Stocks Lower into Afternoon on Yen Strength, Technical Selling, Small-Cap Underperformance, Biotech/Restaurant Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Lower
  

• Sector Performance: Mixed
  

• Volume: Below Average

• Market Leading Stocks: Performing In Line

Equity Investor Angst:

• Volatility(VIX) 14.14 +4.82%

• Euro/Yen Carry Return Index 147.62 -.23%

• Emerging Markets Currency Volatility(VXY) 8.86 -1.34%

• S&P 500 Implied Correlation 50.71 +.32%

• ISE Sentiment Index 87.0 -31.5%

• Total Put/Call .77 -18.09%

• NYSE Arms .78 +37.24% 

Credit Investor Angst:

• North American Investment Grade CDS Index 67.68 +.65%

• European Financial Sector CDS Index 94.98 -1.54%

• Western Europe Sovereign Debt CDS Index 61.18 -.24%

• Emerging Market CDS Index 282.42 -1.80%

• 2-Year Swap Spread 9.0 -.25 basis point

• TED Spread 17.5 -1.75 basis points

• 3-Month EUR/USD Cross-Currency Basis Swap 2.5 +.75 basis point

Economic Gauges:

• 3-Month T-Bill Yield .07% +2.0 basis points

• Yield Curve 250.0 -5.0 basis points

• China Import Iron Ore Spot $139.40/Metric Tonne unch.
  

• Citi US Economic Surprise Index 33.0 unch.

• Citi Emerging Markets Economic Surprise Index -14.70 +.5 point

• 10-Year TIPS Spread 2.11 -2.0 basis points

Overseas Futures:

• Nikkei Futures: Indicating -95 open in Japan

• DAX Futures: Indicating +4 open in Germany

Portfolio: 

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

• Disclosed Trades: Added to my (IWM), (QQQ) hedges

• Market Exposure: Moved to 25% Net Long

Bear Radar

Style Underperformer:

• Small-Cap Value -.62%

Sector Underperformers:

• 1) Restaurants -1.38% 2) Oil Tankers -1.33% 3) Software -1.02%

Stocks Falling on Unusual Volume:

• ARCC, IEP, BURL, LL, VIPS, WNR, PBY, SYY, CASY, MORN, MCK, TPLM, NXPI, POST, GASS, MEI, MTN, SQI, SBUX, CUB, TCP, BIG, ABC, ABM, SRCL, TDS, DGX, GILD, DAR and CPB

Stocks With Unusual Put Option Activity:

• 1) FOXA 2) BZH 3) SPLS 4) BRCM 5) JOY
  

Stocks With Most Negative News Mentions:

• 1) ETR 2) LULU 3) BBRY 4) DGX 5) MORN
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Mid-Cap Growth -.03%

Sector Outperformers:

• 1) Gold & Silver +4.18% 2) Coal +1.42% 3) Internet +.56%
  

Stocks Rising on Unusual Volume:

• RMBS, EVTC, ORBK, OSIS, CAH, ULTA, TRN, AAP, JKS, BIDU, HDS, TWTR, RGLD and NOG

Stocks With Unusual Call Option Activity:

• 1) RMBS 2) ADBE 3) ACAS 4) SPLS 5) LAMR

Stocks With Most Positive News Mentions:

• 1) AAL 2) INTC 3) BAC 4) BURL 5) DDD
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Tuesday Watch

Evening Headlines
Bloomberg: 

• Thai Vote Looms as Yingluck Dissolves Parliament: Southeast Asia. Thai voters face their third election in six years after Prime Minister Yingluck Shinawatra dissolved parliament to help defuse anti-government protests that are now in their second month in Bangkok. 

• Asian Hedge Funds as Much as 42% Cheaper to Run, Survey Says. Running a hedge fund in the Asia-Pacific region can be as much as 42 percent cheaper than in the U.S. and Europe, helped by lower-than-average compensation, according to a survey by Citigroup Inc. (C) Small funds started in the region struggle to achieve profitability and expand assets, the fourth-largest U.S. bank cautioned. Ninety-five, or 57 percent, of the 167 regional equity long-short hedge funds which began trading with less than $50 million still manage less than that amount after an average of 5.3 years in existence, it added, citing data from Singapore-based Eurekahedge Pte. 

• Asian Stock Index Swings Between Gains and Losses. Asian stocks swung between gains and losses after the biggest rally in three weeks, as investors await data on Chinese industrial production. Telecommunication and retail shares led declines while energy companies rose. Shimizu Corp. (1803) gained 3 percent in Tokyo after Credit Suisse Group AG analysts advised buying shares of the building contractor. QBE Insurance Group Ltd. (QBE) led declines on the regional benchmark index, dropping a second day after Australia’s largest insurer by market value forecast an unexpected loss of about $250 million. Doosan Infracore Co. (042670) sank 2.1 percent in Seoul as the construction-equipment manufacturer plans to start selling 40 million new shares. The MSCI Asia Pacific Index slid 0.1 percent to 140.44 at 12:24 p.m. in Hong Kong, having risen as much as 0.1 percent earlier.

• Rebar Falls From Near Two-Month High as Winter Demand Seen Weak. Steel reinforcement-bar futures in Shanghai fell for the first time in three days as a rally to the highest in almost two months spurred some selling amid concern that consumption will weaken in winter. Rebar for May delivery, the most-active contract on the Shanghai Futures Exchange, declined as much as 0.4 percent to 3,708 yuan ($611) a metric ton before trading at 3,714 yuan at 10:59 a.m. local time.

• Ukraine Tension Mounts Over Police Crackdown as EU Envoy Arrives. Tension is rising in the Ukrainian capital after police confronted protesters demanding President Viktor Yanukovych’s ouster, on the eve of a visit of the European Union’s foreign policy chief.

• Wall Street Said to Win Softer Volcker Rule CEO Certification. In a victory for Wall Street, regulators won’t require chief executives to guarantee that their firms are complying with the Volcker rule, only that they have set up proper procedures to assure the proprietary trading ban is being followed, said people familiar with the rule. The wording will be a relief to large bank executives who were concerned that they would have to personally guarantee that their firms were in compliance with the rule. Instead, they will just have to sign off on having policies and systems in place, the people said. 

• Volcker Rule Eases Market-Making While Hedges Face New Scrutiny. U.S. financial regulators, taking a landmark step in the five-year effort to rein in Wall Street, decided to curb some types of trading while largely freeing chief executives from personal responsibility in the final version of the Volcker rule.

Wall Street Journal:

• North Korea Purge Raises Stability Questions. Kim Jong Un's Removal of Uncle Comes as a Surprise. North Korea's highest-profile leadership purge since Kim Jong Un took power is viewed by outside observers as a move to consolidate power that could trigger instability if it upsets the balance between the military and the ruling party.

• China Mobile to Accept iPhone Orders This Week. China Mobile Ltd. plans to take preorders for Apple(AAPL) Inc.'s iPhones from Thursday in Shanghai, according to an advertisement on its website, as the world’s largest mobile carrier by subscribers moves closer to launching high-speed fourth-generation mobile services in the country.

• Retailers Turn Store Clerks Into Web Shippers. From Sears to Saks, Chains Are Trying to Combat Amazon.com. 

• How to Keep Workers Unemployed. Another 99 weeks of jobless insurance won't create more jobs. House-Senate negotiators are close to a modest budget accord to avoid another government shutdown, but suddenly the White House is introducing a last-minute demand. Five years into an economic recovery that President Obama often hails as miraculous, he wants to extend unemployment benefits one more time. Maybe it's time to consider whether the big expansion of unemployment insurance has increased joblessness.

Fox News:

• Seattle facing rift between police and politicians over jump in crime, open pot smoking. Whether it’s commercial airplanes, coffee or computers, Seattle has long been a city known for being ahead of the curve. But now, a range of issues – including a jump in serious downtown crime and open pot smoking – are threatening to open a rift between police and politicians that could damage the city’s image.

CNBC: 

• 'It is time to taper' and end QE3 says Fed's Fisher. The Federal Reserve should start to trim its massive bond-buying program next week, and spell out a clear path for phasing it out altogether, a top Fed official said on Monday. "It is time to taper,'' Dallas Federal Reserve Bank President Richard Fisher said in remarks prepared for delivery to the DTN/The Progressive Farmer AgSummit in Chicago. 

• Why 2014 could be a ‘record year’ for stock listings. Could the boom times be back? Between 250 and 300 initial public offerings (IPOs) will launch in the first three months of 2014 according to professional services firm EY — a level not seen since the financial crisis hit in 2008.

Zero Hedge: 

• Treasury "Out" Of GM For $10.5 Billion Loss (Claims 768% ROI).

• Volcker Rule Details Revealed: Compensation For Prop Trading Will Be Barred... Just Not Prop Trading Itself.

• "The Rent Is Too Damned High". (graph)

• Seeking Guidance...?! (graph)

• Of Keynesian Cul-De-Sacs And The Fed Creating More Financial Market Uncertainty.

• David Stockman Rages Market "Valuation Has Lost Any Anchor To The Real World".

• 37 Reasons Why "The Economic Recovery Of 2013" Is A Giant Lie.

NY Times: 

• Spies Infiltrate a Fantasy Realm of Online Games. Not limiting their activities to the earthly realm, American and British spies have infiltrated the fantasy worlds of World of Warcraft and Second Life, conducting surveillance and scooping up data in the online games played by millions of people across the globe, according to newly disclosed classified documents.

Benzinga: 

• Pep Boys(PBY) Falls 13% After Q3 Results.

StreetInsider:

• PVH Corp. (PVH) Tops Q3 EPS by 6c; Issues Light Q4 Outlook.

of two minds.com:

• Obamacare is a Catastrophe That Cannot Be Fixed. (graph)

Reuters:

• China's air zone announcement was just the beginning. When China announced its decision to claim a wider air zone that encompassed the disputed Senkaku/Diaoyu Island territories, the East China Sea erupted into conflict reminiscent of the Cold War era. In response, the United States and Japan declared the zone illegitimate and flew military aircraft through it, while China deployed fighter jets to identify them. But this was not a simple instance of China overstepping and getting burned - nor was it as sudden and unexpected as headlines suggest. Rather, it was the manifestation of a longstanding Chinese regional strategy that is only just beginning. And China is likely quite pleased with how it is playing out thus far. 

• U.S. state tax revenue growth likely peaked in Q2 -study.

• Texas Instruments(TXN) narrows quarterly forecast in slow economy. Chipmaker Texas Instruments Inc narrowed its fourth-quarter forecast on Monday following concerns on Wall Street that demand was not improving as much as previously expected. The company, seen as a barometer of the chip industry because it makes components for a variety of markets, said in a statement that it now estimates earnings of 44 cents to 48 cents per share on revenue of $2.92 billion to $3.04 billion for the quarter ending in December.

The Obama administration will press ahead Friday with tough requirements for new coal-fired power plants, moving to impose for the first time strict limits on the pollution blamed for global warming. The proposal would help reshape where Americans get electricity, away from a coal-dependent past into a future fired by cleaner sources of energy. It's also a key step in President Barack Obama's global warming plans, because it would help end what he called "the limitless dumping of carbon pollution" from power plants.
Read more at http://www.philly.com/philly/news/politics/20130919_ap_0f857b20e0c144a5a1e1b9dddc9f9d72.html#YRThyDOhArykUeYy.99

Financial Times: 

• Foreign Banks Say China Lending Limits Will Hurt Them. Proposed new rules to restrict interbank loans used by domestic banks to get around govt credit controls will damage foreign banks, citing bankers. New rules would affect key source of funding and revenues for foreign banks.

Yomiuri:

• Japan Abe Cabinet Support Rate Falls 9 Ppt to 55%. Support for cabinet of Japanese Prime Minister Shinzo Abe falls from 64% in Nov., according to Yomiuri poll. Disapproval rate rises 15 ppt to 38%.

Evening Recommendations
Deutsche Bank:

• Rated (DDD) Buy.

• Rated (SSYS) Buy, target $140. 

Night Trading

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

• Asia Ex-Japan Investment Grade CDS Index 134.50 unch.

• Asia Pacific Sovereign CDS Index 106.0 -.25 basis point. 

• FTSE-100 futures -.15%.

• S&P 500 futures +.09%.

• NASDAQ 100 futures +.12%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (TOL)/.43

• (HDS)/.36

• (AZO)/6.28

• (JW/A)/.72

• (SWHC)/.21

• (HRB)/-.37

Economic Releases
7:30 am EST

• The NFIB Small Business Optimism Index for November is estimated to rise to 92.6 versus 91.6 in October.

 10:00 am EST

• JOLTs Job Openings for October are estimated to fall to 3895 versus 3913 in September.

• Wholesale Inventories for October are estimated to rise +.3% versus a +.4% gain in September.

Upcoming Splits

• (GRC) 5-for-4

• (SHI) 3-for-2

Other Potential Market Movers

• The Eurozone Industrial production data, Final Vocker Rule Language, UK trade data, Senate Banking Committee hearing on GSE's, USDA crop report, weekly retail sales reports, 3Y $30B T-Note auction, Capital One Energy Conference, BMO Tech/Digital Media Conference, Goldman Sachs Financial Services Conference, Oppenheimer Healthcare Conference, BofA Merrill Basic Materials Conference, JPMorgan Smid-Cap Conference, (XCO) analyst meeting, (BRCM) analyst day and the (FISV) investor conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by technology and industrial shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.

Stocks Slightly Higher into Final Hour on Stable Long-Term Rates, Weak Yen, Investor Performance Angst, Metals & Mining/Gaming Sector Strength

Broad Equity Market Tone:

• Advance/Decline Line: Lower
  

• Sector Performance: Mixed
  

• Volume: Below Average

• Market Leading Stocks: Performing In Line

Equity Investor Angst:

• Volatility(VIX) 13.90 +.80%

• Euro/Yen Carry Return Index 147.88 +.55%

• Emerging Markets Currency Volatility(VXY) 9.01 -1.64%

• S&P 500 Implied Correlation 50.62 +1.08%

• ISE Sentiment Index 127.0 -14.19%

• Total Put/Call .92 +6.98%

• NYSE Arms .58 -33.22% 

Credit Investor Angst:

• North American Investment Grade CDS Index 67.60 -2.77%

• European Financial Sector CDS Index 96.44 -4.45%

• Western Europe Sovereign Debt CDS Index 61.33 -4.17%

• Emerging Market CDS Index 287.40 -1.57%

• 2-Year Swap Spread 9.25 +.5 basis point

• TED Spread 19.25 +.75 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap 1.75 +1.0 basis point

Economic Gauges:

• 3-Month T-Bill Yield .05% -1.0 basis point

• Yield Curve 255.0 -1.0 basis point

• China Import Iron Ore Spot $139.40/Metric Tonne +.14%
  

• Citi US Economic Surprise Index 33.0 +.5 point

• Citi Emerging Markets Economic Surprise Index -15.20 -1.5 points

• 10-Year TIPS Spread 2.13 +1.0 basis point

Overseas Futures:

• Nikkei Futures: Indicating +29 open in Japan

• DAX Futures: Indicating -5 open in Germany

Portfolio: 

• Slightly Lower: On losses in my biotech/retail sector longs

• Disclosed Trades: Added to my (IWM), (QQQ) hedges, then covered some of them

• Market Exposure: 50% Net Long

Today's Headlines

Bloomberg: 

• German Industrial Production Unexpectedly Fell in October. German industrial production unexpectedly dropped for a second month in October, signaling an uneven recovery in Europe’s largest economy. Output (GRIPIMOM), adjusted for seasonal swings, decreased 1.2 percent from September, when it fell a revised 0.7 percent, the Economy Ministry in Berlin said today. Economists predicted a gain of 0.7 percent, according to the median of 38 estimates in a Bloomberg News survey. Production climbed 1 percent from a year earlier when adjusted for working days.

• Merkel Faces Dissent From Party Ranks Over SPD Coalition Accord. German Chancellor Angela Merkel faces internal party resistance to her planned coalition with the Social Democrats as efforts by both sides to form a joint government for her third term enter the final phase. 

• Putin to Shut RIA in Overhaul of Russian State News Coverage. President Vladimir Putin unexpectedly revamped Russian state-controlled print and radio news media, abolishing the RIA Novosti wire service and naming an outspoken television presenter to lead its successor. Dmitry Kiselyov, a deputy director of Russia’s state television and radio holding VGTRK and a host of a weekly news program on the Rossiya 1 television channel, will head the newly formed agency, called Rossiya Segodnya or Russia Today, according to a document signed by Putin and published on the Kremlin’s website today. 

• Ukraine Police Raid Tymoshenko Offices, Destroy Barriers. Ukrainian police stormed the offices of jailed ex-premier Yulia Tymoshenko’s party and tore down barricades erected by protesters urging President Viktor Yanukovych’s ouster as tensions rose on the 19th day of rallies.

• Ukraine Interbank Rates Soar to 20% as Intervention Drains Cash. Ukrainian interbank lending rates soared to a one-year high as policy makers’ bid to prop up the currency depletes cash from the economy and threatens to deepen the country’s third recession since 2008. The KievPrime overnight index, which shows one-day borrowing costs for the country’s lenders, jumped to 20 percent at today’s daily fixing from 12 percent on Dec. 6 and 4.32 percent on Nov. 29. Investors sold Ukraine’s dollar notes, driving yields to record highs, after the country’s foreign reserves dwindled 9 percent last month, according to central bank data published on Dec. 6. 

• European Stocks Rise a Second Day as Chinese Exports Gain. European stocks rose for a second day after a report showed Chinese exports climbed more than expected and a gauge of telecommunications operators gained. Inmarsat Plc rallied 5.8 percent, lifting a gauge of phone companies higher. Banca Monte dei Paschi di Siena SpA advanced 4.9 percent after the lender’s largest investor said it would vote against any share sale taking place before May. The Stoxx Europe 600 Index added 0.2 percent to 317.15 at the close of trading in London after earlier falling as much as 0.2 percent.

• Brent Crude Falls on German Data as WTI Discount Narrows. Brent crude dropped after German industrial output unexpectedly fell, signaling an uneven recovery for Europe’s largest economy. The oil’s premium over West Texas Intermediate shrank for the fourth time in five days. Futures slid as much as 1.7 percent.

• Jumbos Surge 34% With Record ARMs Belying ’08 Anxiety: Mortgages. Jumbo loans, both adjustable and fixed-rate, increased by 34 percent to $216 billion in the first nine months of this year, with ARMs comprising the majority of the gain, said Guy Cecala, publisher of Inside Mortgage Finance, a trade publication in Bethesda, Maryland. A decade ago, jumbo ARMs helped fuel the housing bubble by letting buyers qualify for homes they only could afford at the low rates before they reset. Banks approved mortgages based on the assumption that house prices would keep rising and the loans could be refinanced before higher costs kicked in.

• Glass-Steagall Fans Plan New Assault If Volcker Rule Deemed Weak. Five U.S. agencies will finish the Volcker rule tomorrow after more than three years of Wall Street resistance to its limits on trading and investing. Lawmakers and their allies who want to rein in big banks are ready to pounce if it isn’t strict enough. 

• Sysco(SYY) to Acquire US Foods for $3.5 Billion. Sysco Corp. (SYY) agreed to acquire closely held US Foods for $3.5 billion, adding brands from Cattleman’s meat to Devonshire desserts, in the largest food-distribution deal in eight years in North America. The shares jumped the most since at least 1980.

Wall Street Journal: 

• Americans Continue to Regain Lost Wealth. U.S. Net Worth Rises to $77.3 Trillion; Mortgage Borrowing Rises for First Time in Recovery.

Fox News:

• ObamaCare exchanges limit access to top hospitals, medical centers. If you like your hospital, you might not be able to keep it. In the latest surprise to emerge during the implementation of the Affordable Care Act, people seeking insurance on the ObamaCare exchanges are finding the plans limit access to some of the best-ranked hospitals and cancer centers in the country. The access problem is a byproduct of the effort to drive down costs of subsidized coverage, prompting insurance companies to shy away from more expensive facilities.

MarketWatch:

• This bubble blowing bull market won’t end well.

• Fed's Lacker: Taper on the table in December.

• Emerging budget deal won’t trim U.S. debt.

CNBC:

• Investors have been fleeing the municipal bond market. The U.S. municipal bond market shrank to $3.686 trillion in the third quarter of the year, the smallest since the end of 2009, from $3.721 trillion in the second quarter of the year, according to Federal Reserve data released on Monday. Households held $1.64 trillion in bonds in the quarter, the lowest since the final quarter of 2006 and less than the $1.67 trillion they held in the second quarter, according to the report on the country's financial accounts.

• Fed could do 'small' QE taper in nod to job gains: Bullard.

• Retail and big-money crowd heading in opposite directions. Mom-and-pop retail investors are zigging and big-money institutions are zagging as the market tries to figure out which way things are going after a record-busting year on Wall Street. While the overall market mood is solidly bullish, recent fund flows show almost diametrically opposed views as to where money will be best treated.

Zero Hedge: 

• Why We're Stuck with a Bubble Economy. (graph)

• Greece Tumbles Into The Deflationary Abyss, While Its Primary Surplus Sounds The "Grexit" Alarm. (graph)

• Quote Of The Day: UK Housing Market "Warp Speed" Edition.

• US Gets Involved In Another Foreign Conflict, Will Support French Troops In Central African Republic.

• Chart Of The Day: Jobs, Jobs, Jobs.

Business Insider: 

• Things Are Getting Ugly In San Francisco: Protestors Stopped A Google(GOOG) Bus From Moving.

• There's A Brewing Democratic Civil War, And Elizabeth Warren Is Leading The Charge. 

• Competing Global Derivatives Rules Could Lead To 'Chaos'.

New York Times:

• South Korea Announces Expansion of Its Air Defense Zone. Defying both China and Japan, South Korea announced on Sunday that it was expanding its air patrol zone for the first time in 62 years to include airspace over the East China Sea that is also claimed by Beijing and Tokyo.

Credit Bubble Stocks:

• Hussman's Ratio of Margin Debt to Commercial and Industrial Loans. (graph)

Real Clear Politics:

• The Clash of Generations.

Reuters:

• China to aid ailing shipbuilders with more subsidies. China is handing out new subsidies for buying ships to help its beleaguered shipbuilders, confounding a government pledge to reduce support for sectors with over-capacity in order to reform the economy.

• McDonald's(MCD) November sales miss as U.S. weakness persists. The fast-food chain, the world's largest by revenue, has struggled for more than a year to significantly increase those monthly sales, hindered by slack demand and intense competition for the business of budget-conscious diners. November's biggest disappointment came from the United States, where monthly sales at restaurants open at least 13 months fell 0.8 percent, versus the 0.3 percent gain expected, on average, by 14 analysts polled by Consensus Metrix.

Telegraph:

• Money printing, search for yield and the mirage of financial stability. Unfortunately, the near free money environment has gone on for much longer than anyone anticipated, and we seem incapable of easing ourselves off the life support.

London South East:

• Putin Taps Hardline TV Anchor To Head New News Agency. President Vladimir Putin on Monday disbanded Russia's biggest news agency and appointed a hardline state television anchor to head a new media outlet, measures seen as a crackdown on media freedom. Dmitry Kiselyov will head Rossia Segodnya, a new news agency that will replace RIA Novosti, according to an order published on the Kremlin's website. A deputy director of Russia's state TV holding VGTRK, Kiselyov rose to prominence as host of the Sunday weekly news programme on the Rossia 1 channel, where he fiercely criticises the West.

Xinhua:

• China Won't Rely on GDP to Assess Local Officials. China won't use GDP as the only major indicator to assess local government and officials' performance, citing a statement from the Organization Department of the Communist Party of China Central Committee. China will strengthen inspection of local govt debt and use it as an "important indicator" for local officials' performance reviews.China will change government official assessment from purely comparing economic growth to development sustainability. Greater emphasis of local official evaluation will be placed on environmental protection, product safety and elimination of excess capacity. Economic growth shouldn't be achieved by excess investment and high pollution, it said.