Stocks Lower into Final Hour on Rising Emerging Markets/European Debt Angst, Ukraine Unrest, US Economic Data, Financial/Gaming Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Lower
  

• Sector Performance: Mixed
  

• Volume: Below Average

• Market Leading Stocks: Underperforming

Equity Investor Angst:

• Volatility(VIX) 14.85 +7.07%

• Euro/Yen Carry Return Index 146.75 -.10%

• Emerging Markets Currency Volatility(VXY) 8.65 +.70%

• S&P 500 Implied Correlation 52.58 +3.04%

• ISE Sentiment Index 100.0 +14.94%

• Total Put/Call .90 +16.88%

• NYSE Arms 1.15 -26.79% 

Credit Investor Angst:

• North American Investment Grade CDS Index 64.95 +1.19%

• European Financial Sector CDS Index 89.35 +1.29%

• Western Europe Sovereign Debt CDS Index 52.66 +1.27%

• Asia Pacific Sovereign Debt CDS Index 103.95 +2.09%

• Emerging Market CDS Index 341.54 +3.09%

• China Blended Corporate Spread Index 356.92 +.44%

• 2-Year Swap Spread 13.5 +.25 basis point

• TED Spread 18.25 -3.75 basis points

• 3-Month EUR/USD Cross-Currency Basis Swap -5.25 -.5 basis point

Economic Gauges:

• 3-Month T-Bill Yield .05% +3.0 basis points

• Yield Curve 242.0 +1.0 basis point

• China Import Iron Ore Spot $123.90/Metric Tonne -.4%

• Citi US Economic Surprise Index -4.0 -4.0 points

• Citi Emerging Markets Economic Surprise Index 19.0 -1.2 points

• 10-Year TIPS Spread 2.15 -1.0 basis point

Overseas Futures:

• Nikkei Futures: Indicating -12 open in Japan

• DAX Futures: Indicating -32 open in Germany

Portfolio: 

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

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

• Market Exposure: Moved to 25% Net Long

Today's Headlines

Bloomberg:

• Ukraine Moves Toward Martial Law as Western Region Splits. Ukrainian President Viktor Yanukovych moved to quell a growing insurgency by granting sweeping powers to the army and police after a region declared independence from his government, risking wider conflict. Reeling from the bloodiest clashes in a three-month standoff, the Russian-backed leader’s security service said today it’s undertaking a nationwide anti-terrorism operation to restore public order and protect state borders. That gives the army the right to search, detain and even fire on Ukrainians in the course of the operation, the Defense Ministry said in a statement posted on the government’s website.

• Russia Cancels Bond Auctions as Ruble Slides, Yields Climb. Russia canceled its bond auctions for the third time in less than a month as the ruble’s slide to a record low drove up borrowing costs.  The Finance Ministry pulled the sales of 10 billion rubles ($280 million) of January 2028 securities and the same amount of May 2020 notes because “bids didn’t adequately reflect the credit quality of the bonds,” it said in website statements. The yield on the 2028 debt rose 18 basis points to 8.62 percent by the close in Moscow, the highest on record. 

• IMF Warns G-20 of Risks of Deflation, Emerging-Market Turmoil. Risks of prolonged market turmoil in emerging markets and of deflation in the euro area are threatening the world’s improved economic prospects, according to the International Monetary Fund staff. In a note prepared for central bankers and finance ministers from the Group of 20, the IMF said the recovery is still weak and “significant downside risks remain.” A January global growth forecast of 3.7 percent for this year, from 3 percent in 2013, hinges on recent market volatility from Turkey to Brazil being short lived, staff wrote.

• Wall Street Girds for China Bribery Probe as IPOs Beckon. Wall Street hiring in Asia is coming under increasing scrutiny in the wake of a U.S. criminal investigation into whether JPMorgan Chase & Co. employed children of China’s elite in violation of anti-bribery laws. 

• Merkel Joins Developed Nations Backing Fed Taper Before G-20. Developed nations are voicing support for the withdrawal of U.S. monetary stimulus and signaling emerging markets will have to cope with the fallout as best as they can. German Chancellor Angela Merkel’s administration sees U.S. monetary normalization as necessary, a government official told reporters in Berlin overnight. The comment echoes Australian Treasurer Joe Hockey, who in a Feb. 13 interview likened Federal Reserve bond purchases to a drug that the world can’t rely on forever. 

• European Stocks Little Changed as Tenaris, Vallourec Drop. European stocks were little changed, erasing their decline in the final 90 minutes of trading, as Tenaris SA (TEN) and Vallourec SA (VK) slid after the U.S. failed to impose anti-dumping duties on South Korea in a preliminary decision. Tenaris and Vallourec, which make steel tubes, slid at least 4.5 percent. Wolters Kluwer NV slid 4.6 percent after saying restructuring costs will reduce its profit margin in 2014. Lafarge SA (LG) and Carlsberg A/S (CARLB) each rose more than 3 percent after posting fourth-quarter profits that beat estimates. The Stoxx Europe 600 Index added 0.1 percent to 334.94 at the close after earlier dropping as much as 0.6 percent.

• WTI Crude Rises With Cushing Supplies Expected to Fall. March futures for ultra low sulfur diesel, a proxy for heating oil, increased 3.62 cents, or 1.2 percent, to $3.1379 a gallon on the Nymex. Volume was 10 percent above the 100-day average. 

• U.S. Steel Drops After U.S. Rules Korea Isn’t Dumping. U.S. Steel Corp. (X), the nation’s largest producer of the metal by volume, fell the most in 17 months after the Department of Commerce rejected its claim that South Korea is selling steel tubing into the U.S. below cost. U.S. Steel fell 5.8percent to $25.18 at 10:52 a.m. in New York, after declining as much as 7.3 percent, the biggest intraday drop since Aug. 23, 2012. 

• Fed to Change Rate Guidance as Unemployment Falls, Minutes Show. Federal Reserve policy makers plan to soon change their guidance for the path of interest rates as unemployment declines toward a threshold for considering an increase in borrowing costs, minutes of their January meeting showed. “Participants agreed that, with the unemployment rate approaching 6.5 percent, it would soon be appropriate for the Committee to change its forward guidance in order to provide information about its decisions regarding the federal funds rate after that threshold was crossed,” according to the record of the meeting, the final one led by Ben S. Bernanke before the end of his term as central bank chairman. “Several” Fed policy makers also said that in “the absence of an appreciable change in the economic outlook, there should be a clear presumption in favor of continuing to reduce the pace” of the Fed’s bond purchases $10 billion at each meeting.

• Einhorn Says Don’t Be Fooled by Companies Beating Estimates. Hedge-fund manager David Einhorn cautioned against betting on the extension of a U.S. stock-market rally that he said was fueled by conditions that are difficult to sustain. The Standard & Poor’s 500 Index surged 30 percent last year. The rally strengthened in the fourth quarter as 74 percent of companies beat analysts’ estimates during the earnings season that ended in November. The equity benchmark is little changed this year after recovering from January declines.

Wall Street Journal:  

• Deadly Clashes in Ukraine. Streaming Coverage:

• FCC Plans to Issue New 'Net Neutrality' Rules. Agency Seeks to Prevent Blocking or Slowing Down of Websites by Internet Providers. The Federal Communications Commission said Wednesday that it will craft new rules to prevent Internet service providers from charging companies like Netflix Inc. NFLX -0.68% or Google Inc. GOOG -0.40% a toll to reach consumers at the highest speeds.

• Health Law's Impact Has Only Begun. Insurers Seek Healthy Enrollees, Doctors Educate New Patients, Employers Wrestle With Added Costs.

• Fed's Bullard Sees Steady Fed Taper.

Fox News:

• Is Ukraine seeing first days of civil war? (video)

MarketWatch:

• Tesla(TSLA) needs to hit these numbers to sustain its gains.

CNBC:

• Lockhart: It would take a lot to knock tapering plan off course. The Federal Reserve will likely end its bond-buying program by the fourth quarter unless the economy takes a serious turn for the worse, a top official at the central bank said Wednesday. Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said he expects the economy to grow as much as 3 percent this year and that it was too early to know if a spate of weak data signaled fundamental troubles or the temporary effects of a particularly cold winter. He added that he's still comfortable with the Atlanta Fed's forecast for a rate hike in the second half of 2015.

• Natural gas soars on threat of another polar vortex in March. Natural gas futures spiked on forecasts of another arctic air blast descending on North America and unseasonably cold temperatures in March. March futures soared 10 percent, to more than $6 per million BTUs—a more than four-year high. Natural gas is up nearly 44 percent since Jan. 1, after unusually cold weather sparked record demand and forced a massive draw-down in storage. 

• Big Labor’s Mounting Feud with Barack Obama.

ZeroHedge:

• China Training For "Short, Sharp War" With Japan, US Navy Warns.

• Housing Starts Plunge Most In 3 Years; Permits Tumble - Miss By Most In 7 Months. (graph)

• What's Wrong With These Two Charts. (graph)

• Yen Pushes Market Back To Unchanged On The Year (As US Macro Collapses To 6-Month Lows). (graph)

• In 2013 The Fed Bought 150% More Treasurys Than All Foreigners Combined. (graph)

• Stocks Slide After Fed Uberdove Williams Pours Water On Untaper Hopes.

ValueWalk: 

• Notes to the FOMC – John Mauldin.

Business Insider: 

• BEFORE AND AFTER: Kiev's Independence Square. (pics)

• Video Shows Pussy Riot Members Being Beaten By Cops During A Performance In Sochi.

• 3 Reasons Why The Russian Ruble Is Crumbling.

• The Housing Recovery Has Been Deteriorating For Over A Year Now. (graph)

LA Times:

• European regulator concerned about new Fed rules for foreign banks. A top European Union regulator raised concerns Wednesday about new Federal Reserve rules for foreign banks operating in the U.S., complaining the requirements were adopted unilaterally and could place an unfair burden on EU financial firms.

ABC News:

• The Myths of Marijuana: Former DEA Chief Says Pot Legalization a 'Disaster'. (video)
  
  Peter Bensinger warns that marijuana is not as harmless as many believe.

Reuters:

• Nasdaq to roll out 'kill switch' to help catch trading errors. Nasdaq OMX Group plans to roll out a "kill switch" that would cut off trading of its member firms when pre-set limits are breached, the exchange operator said in a regulatory filing.' 

• Shock investment slump and no Sochi surge deepens Russia's economic woes. A dramatic slump in capital investment by Russian companies in January pointed on Wednesday to Russia's ailing economy continuing to deteriorate fast. There was no sign in data of a boost from preparations for the Sochi Olympics as investment fell by 7 percent compared with a year earlier, a huge undershoot compared with analysts' forecasts in a Reuters poll of a 0.5 percent rise. "It's terrible. It's like in 2009," said Natalia Orlova, an economist at Alfa Bank, referring to the year when Russia's economy shrank by 8 percent as the global financial crunch wreaked havoc on corporate finances. The unexpected plunge in investment last month comes after a year of stagnation. It fell by 0.3 percent in 2013, according to official estimates - a major factor behind lacklustre economic growth of 1.3 percent last year.

Telegraph: 

• Turkey spoils emerging market story as politics go haywire. No country so rudely exposes the illusions behind the $8 trillion stampede into emerging markets more than Turkey.

Bear Radar

Style Underperformer:

• Small-Cap Value -.63%

Sector Underperformers:

• 1) Banks -1.51% 2) Alt Energy -1.43% 3) Gold & Silver -1.35%

Stocks Falling on Unusual Volume:

• OAKS, SM, KMP, PBPB, OCR, LZB, APL, ATLS, SN, TS, TEX, SYKE, MFRM, BCOR, PAIL, DRC, NICE, HSTM, RATE, THG, GRFS, NVS, EPAM, CHE, JOSB, ROSE, CLMT, X and GDP

Stocks With Unusual Put Option Activity:

• 1) CNP 2) PNRA 3) HTZ 4) HD 5) KSU
  

Stocks With Most Negative News Mentions:

• 1) NFLX 2) BAC 3) PEP 4) SCTY 5) CA
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Mid-Cap Value +.22%

Sector Outperformers:

• 1) Coal +4.45% 2) Oil Service +.94% 3) Agriculture +.78%
  

Stocks Rising on Unusual Volume:

• ZLC, UCTT, SIG, GRMN, ARWR, ACT, CF, NBR, SIX, CBL, CCIH, EBIX, DORM, LAD, LL, AHT, GOGO, FLS, SAVE, BRKR and OMER

Stocks With Unusual Call Option Activity:

• 1) ACAS 2) OAS 3) SGY 4) MYL 5) AUXL

Stocks With Most Positive News Mentions:

• 1) LLY 2) GRMN 3) QCOM 4) DVN 5) LNKD
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Wednesday Watch

Evening Headlines 
Bloomberg:

• Ukraine Fighting Kills at Least 18 as Kiev Barricades Burn. Clashes in Ukraine between police and anti-government activists killed at least 18 people and left hundreds injured in the bloodiest episode of the country’s three-month standoff. Eleven civilians and seven policemen were confirmed dead during clashes yesterday and through the night as security forces moved to clear out the main protest camp in Kiev. Thousands gathered on central Independence Square, with burning barricades ringing protesters hurling firebombs at officers backed by water cannons and military vehicles. 

• Kuroda Easing Doomed as Yen Seen Missing 120 Level. Strategists’ forecasts signal the Bank of Japan will fail to reach its 2 percent inflation target as yen declines next year won’t be sufficient. Japan’s currency will tumble 11 percent to 115 per dollar in 2015, according to a Bloomberg of analysts, short of the 120 level economists estimate will be needed for consumer prices to reach the BOJ’s goal. The breakeven rate, which reflects bond investors’ expectation of future inflation, signal a 1.16 percent increase in the cost of living in the coming decade. The figure is 2.16 percent in the U.S. and 1.35 percent in Germany.

• China Cuts Treasury Holdings Most Since 2011 Amid Taper. China, the largest foreign U.S. creditor, reduced holdings of U.S. Treasury debt in December by the most in two years as the Federal Reserve announced plans to slow asset purchases. The Communist nation reduced its position in U.S. government bonds by $47.8 billion, or 3.6 percent, to $1.27 trillion, the largest decline since December 2011, according to U.S. Treasury Department data released yesterday. At the same time, international investors increased holdings by 1.4 percent, or by $78 billion, in December, pushing foreign holdings to a record $5.79 trillion.

• China Probes Former Zhou Yongkang Secretary Ji Wenlin. China is probing a one-time aide to Zhou Yongkang for discipline violations, the latest official to be ensnared by corruption investigations surrounding the retired Politburo Standing Committee member. 

• Lew Tells G-20 Risks Linger as Emerging Markets Cloud Outlook. U.S. Treasury Secretary Jacob J. Lew said risks including volatility in emerging markets and China’s economic agenda are clouding the global outlook, requiring nations to focus on boosting growth and job creation. “There has been considerable volatility in global markets, especially in several emerging markets,” Lew said in a letter yesterday to his Group of 20 colleagues. “We are monitoring these developments closely.”

• Most Asian Stocks Fall as Baht Weakens; Oil Extends Climb. Most Asian stocks fell, snapping a three-day advance in the regional index, while Thailand’s baht led declines in higher-yielding currencies. Oil gained before stockpiles data and silver slipped. The MSCI Asia Pacific Index lost 0.1 percent by 10:54 a.m. in Tokyo and Standard & Poor’s 500 Index (SPX) futures were down 0.1 percent.

• Quant Funds Feel Investor Bite After Underperforming. Investors are losing patience with hedge-fund managers who rely on computers to follow global market trends after three years of underperformance.

Wall Street Journal:

• Deadly Clashes in Ukraine. (streaming coverage)

• Brazil Stocks Close Lower, Pulled Down by Stop-Loss Orders. Brazilian shares closed lower Tuesday, with some stocks plummeting as stop-loss orders kicked in after the benchmark index dropped below important levels. The Ibovespa index declined 2.1% to 46599, with shares including PDG Realty, Anhanguera Educacional Participacoes and Marfrig dropping more than 8%. 

• As Coffee Soars, That Cup of Joe May Get Pricier. 

• Hurting the 0.3%. CBO says a $10.10 minimum wage could cost 500,000 jobs.

Fox News:

• Name game: Amid opposition, states change title of Common Core. It might take more than a name change to quell parental anger at Common Core, the controversial national education standards adopted by all but four states.

CNBC:

• The China risk you may have forgotten about. China's shadow-banking problems may have grabbed headlines, but its long-bubbling property sector continues to pose risks to the economy, analysts said. The property market is the biggest concern about China right now, Adrian Mowat, chief Asian and emerging market equity strategist at JPMorgan, told CNBC. 

• Markets want to know if housing activity is freezing again. After the steep drop in homebuilder sentiment in February, Wednesday's housing starts report could have more impact than usual.

Zero Hedge:

• Spanish Bad Loans Hit Record; Surge Most In A Year. (graph)

• Obama's Minimum Wage Boost Will Result In Even More Job Losses, CBO Finds. (graph)

• The IMF Reports: "Debt Is Good".

• Scary Chart Of The Day: Average Foreign Purchases Of US Securities Take Out Lehman Low.

• Is Housing Set To Lift Off? (Spoiler Alert: No!) (graph)

• Ukraine Slide Accelerates: AG Office Seized, Criminal Files Being Set On Fire; US To Hold Government Responsible.

• GMO: "US Markets Are Not A Little Bit Overvalued — They Are Overvalued By A Hefty Margin".

• Americans Are Angrier & More Frustrated Than Ever: 19 Furious Facts.

Business Insider:

• POLICE ATTACK KIEV PROTESTERS — AND THE IMAGES ARE INSANE.

• Why Wall Street Never Tells You To Sell.

Reuters:

• U.S. concerned about Japan domestic demand outlook. The United States expressed concern on Tuesday about whether domestic demand will remain a principal driver of Japan's economy. "Japan's economy has been largely driven by domestic demand over the last two years, but the outlook for domestic demand has clouded," U.S. Treasury Secretary Jack Lew said in a letter to members of the Group of 20, which includes many of the world's largest economies.

• Panera Bread(PNRA) says bad weather hurting first-quarter sales. Panera Bread Co gave a disappointing profit forecast for the current quarter after blaming inclement weather for hurting customer visits to its bakery cafes. The news dragged its shares down 1.4 percent in after-hours trade on Tuesday.

• TABLE-Delinquency rates rise at major U.S. banks in January.

South China Morning Post:

• China Said to Push Media to Avoid Foreign-Bank Researchers. Central govt's propaganda debt instructs sr editors to be "cautious" about who they invite to talk about the nation's economy, citing economic researchers working for state-owned media. Govt concerned about what's said about problems, challenges. While there's no "black list or white list," media clearly encouraged to invite economists, analysts from domestic banks, brokerages to speak, esp. on live broadcasts. CBRC reduces meetings with economists from foreign banks; only "small number" of trusted people invited.

People's Daily:

• China Should Boost Risk Control on LGFV Credit, CBRC Head Writes. China should strengthen risk controls on credit to local government financing vehicles, property market and industries with overcapacity, China Bnaking Regulatory Commission Chairman Shang Fulin writes in an article. The overall risk to the banking system is controllable, while regional risk are increasing, Shang wrote.

Evening Recommendations
 Stifel:

• Rated (URI) Buy, target $99.

• Rated (OSK) Buy, target $66.

Night Trading

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

• Asia Ex-Japan Investment Grade CDS Index 132.0 unch.

• Asia Pacific Sovereign CDS Index 101.75 unch.

• FTSE-100 futures -.12%.

• S&P 500 futures -.10%.

• NASDAQ 100 futures -.02%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (MGM)/.00

• (DVN)/1.08

• (LL)/.72

• (EV)/.59

• (SNPS)/.52

• (MAR)/.49

• (WMB)/.21

• (CAR)/.12

• (VECO)/-.33

• (JACK)/.66

• (SWY)/.48

• (TSLA)/.25

• (REV)/.82

Economic Releases
8:30 am EST

• PPI Final Demand for January is estimated to rise +.1% versus a +.1% gain in Deember.

• The PPI Ex Food and Energy for January is estimated to rise +.1% versus unch. in December.

• Housing Starts for January are estimated to fall to 950K versus 999K in December.

• Building Permits for January are estimated to fall to 975K versus 986K in December.

Upcoming Splits

• None of note

Other Potential Market Movers

• The Fed's Lockhart speaking, Fed's Bullard speaking, Fed's Williams speaking, China HSBC Manufacturing PMI, Japan Trade Balance, weekly retail sales reports, weekly MBA mortgage applications report and the Barclays Industrial Select Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by commodity and industrial 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 Slightly into Final Hour on Yen Weakness, Lower Long-Term Rates, Biotech/Energy 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) 13.87 +2.21%

• Euro/Yen Carry Return Index 146.85 +.77%

• Emerging Markets Currency Volatility(VXY) 8.63 -.46%

• S&P 500 Implied Correlation 51.58 +1.54%

• ISE Sentiment Index 100.0 +4.17%

• Total Put/Call .75 -8.54%

• NYSE Arms 1.48 +47.32% 

Credit Investor Angst:

• North American Investment Grade CDS Index 63.91 +.17%

• European Financial Sector CDS Index 88.20 +.40%

• Western Europe Sovereign Debt CDS Index 52.0 -1.89%

• Asia Pacific Sovereign Debt CDS Index 101.83 +.10%

• Emerging Market CDS Index 332.99 +1.10%

• China Blended Corporate Spread Index 355.37 +.26%

• 2-Year Swap Spread 13.25 unch.

• TED Spread 22.0 -.5 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -4.75 +.5 basis point

Economic Gauges:

• 3-Month T-Bill Yield .02% +1.0 basis point

• Yield Curve 241.0 -2.0 basis points

• China Import Iron Ore Spot $124.40/Metric Tonne unch.

• Citi US Economic Surprise Index 0.0 -17.6 points

• Citi Emerging Markets Economic Surprise Index 20.20 +.1 point

• 10-Year TIPS Spread 2.16 -1.0 basis point

Overseas Futures:

• Nikkei Futures: Indicating -18 open in Japan

• DAX Futures: Indicating -4 open in Germany

Portfolio: 

• Higher: On gains in my biotech/medical/tech sector longs and emerging markets shorts

• Disclosed Trades: None

• Market Exposure: 50% Net Long