Monday, May 05, 2014

Stocks Reversing Higher into Final Hour on Central Bank Hopes, Short-Covering, Biotech/Utility Sector Strength

Broad Equity Market Tone:
  • Advance/Decline Line: Modestly Lower
  • Sector Performance: Mixed
  • Volume: Light
  • Market Leading Stocks: Underperforming
Equity Investor Angst:
  • Volatility(VIX) 13.11 +1.55%
  • Euro/Yen Carry Return Index 147.82 -.09%
  • Emerging Markets Currency Volatility(VXY) 7.74 -.26%
  • S&P 500 Implied Correlation 56.73 -.70%
  • ISE Sentiment Index 113.0 unch.
  • Total Put/Call .87 -9.37% 
  • NYSE Arms 1.31 +51.91% 
Credit Investor Angst:
  • North American Investment Grade CDS Index 64.19 -.05%
  • European Financial Sector CDS Index 78.11 -.07%
  • Western Europe Sovereign Debt CDS Index 34.0 -.31%
  • Asia Pacific Sovereign Debt CDS Index 88.38 +1.03%
  • Emerging Market CDS Index 281.81 +.28%
  • China Blended Corporate Spread Index 351.30 -.58%
  • 2-Year Swap Spread 14.0 +1.5 basis points
  • TED Spread 20.75 unch.
  • 3-Month EUR/USD Cross-Currency Basis Swap -3.75 -.25 basis point
Economic Gauges:
  • 3-Month T-Bill Yield .02% unch.
  • Yield Curve 219.0 +3.0 basis points
  • China Import Iron Ore Spot $105.90/Metric Tonne -.09%
  • Citi US Economic Surprise Index -12.60 +6.3 points
  • Citi Emerging Markets Economic Surprise Index -29.20 -2.6 points
  • 10-Year TIPS Spread 2.18 -1.0 basis point
Overseas Futures:
  • Nikkei Futures: Indicating -75 open in Japan
  • DAX Futures: Indicating +14 open in Germany
Portfolio: 
  • Higher: On gains in my biotech/tech/medical sector longs and emerging markets shorts
  • Disclosed Trades: Covered some of my (IWM)/(QQQ) hedges, then added them back
  • Market Exposure: 50% Net Long

Today's Headlines

Bloomberg:
  • Ukraine Troops Killed in Slovyansk as Rebels Down Chopper. Ukrainian troops facing off against pro-Russian separatists in the eastern city of Slovyansk suffered fatalities in an ambush and a helicopter was shot down as unrest spread and roadblocks were set up around the capital. The pilots survived after the military chopper was hit with machine-gun fire and crashed into a river near the city in the Donetsk region, the Defense Ministry said on its website. Four Interior Ministry troops were killed and 30 were wounded fighting rebels in Slovyansk, the ministry said in a statement. The campaign to drive out insurgents from the easternmost regions is in danger of stalling as a growing death toll threatens the government’s efforts to retake positions from Russian sympathizers in the run-up to May 25 presidential elections. With violence spiraling in Ukraine after dozens died in Odessa three days ago, the authorities moved to erect roadblocks around the capital Kiev to prevent provocations.
  • EU Cuts Euro-Area Growth Outlook as Inflation Seen Slower. The European Commission predicted low inflation will remain a threat to euro-area expansion for at least the next two years as it trimmed its economic-growth forecast and warned of the impact of tensions with Russia. The 18-nation euro zone’s inflation rate will be 0.8 percent this year and 1.2 percent in 2015, both lower than forecast in February and well below the European Central Bank’s target of just below 2 percent, the Brussels-based commission said today. Gross domestic product is projected to rise 1.7 percent in 2015, compared with the commission’s previous forecast of 1.8 percent.
  • Iron Ore Seen Slumping Below $100 as Supply Surge Widens Glut. Iron ore may drop to less than $100 a ton for the first time since 2012 as swelling global supplies push the global seaborne market into surplus and demand growth in China, the largest user, slows amid tighter credit. Prices of the steelmaking ingredient may decline to $95 in the fourth quarter, according to CLSA Ltd., a unit of Citic Securities Co., China's largest brokerage by market value. SSY Futures Ltd. sees a retreat below $100 "very shortly." The commodity may drop as Australian exports increase and Chinese demand growth slows, according to Wood Mackenzie Ltd. Goldman Sachs Group Inc. forecasts a fourth-quarter average of $100. Shipments from Australia's Port Hedland rose to a record last month, while stockpiles at ports in China are at an all-time high.
  • E-House Falls as Property Concern Mounts: China Overnight. Chinese stocks trading in the U.S. snapped a four-day gain as E-House China Holdings Ltd. (EJ) led a drop in real estate companies amid mounting concern that home sales in the world’s second-largest economy are slowing. The Bloomberg index of the most-traded Chinese shares in the U.S. fell 0.8 percent to 99.31 as of 12:17 p.m. in New York. The American depositary receipts of E-House, a real-estate agent, dropped as much as 6.1 percent.
  • European Stocks Decline on Ukraine, Chinese Manufacturing. European stocks fell, following a third week of gains for the region’s equities, as violence intensified in eastern Ukraine, while a report showed Chinese manufacturing contracted for a fourth month. Credit Suisse Group AG dropped 2.3 percent after JPMorgan Chase & Co. forecast its own trading revenue will slide this quarter. Wincor Nixdorf AG lost 5.1 percent after the maker of self-checkout tills in supermarkets posted worse-than-expected earnings. Wacker Chemie AG dropped 3 percent after the chemical maker also reported earnings that missed estimates. The Stoxx Europe 600 Index slid 0.3 percent to 336.89 at the close after earlier falling as much as 0.9 percent.
  • Investors Tiring of Junk Bonds Lift Trades Most Since ’09. The more than doubling of their money since 2008 has some junk-bond investors getting restless. Trading (NTMBHV) in the highest-risk corporate debt is climbing as money managers show a willingness to part with securities that handed them 144 percent returns in five years. Average volumes increased 5 percent in April from the previous three months, the first advance for the period since 2009, according to data compiled by the Financial Industry Regulatory Authority.
  • Holder Signals Criminal Charges Coming Against Some Banks. U.S. Attorney General Eric Holder said his department is readying criminal cases against banks that show financial institutions aren’t too big to prosecute. Holder, in a video message posted today on the department’s website, said improved coordination with regulators is creating a relationship that “will prove key in the coming weeks and months” as prosecutors pursue charges. The government is nearing decisions on whether to charge Credit Suisse Group AG (CSGN) and BNP Paribas SA, (BNP) people familiar with those probes said. Holder didn’t specify any banks.
  • JPMorgan(JPM) Leads Wall Street Banks Lower on Trading-Slump Forecast. JPMorgan Chase & Co. (JPM:US) led shares of Wall Street banks lower, dropping the most in almost a month, after warning that a deepening trading slump may last through the second quarter. Shares of the company tumbled 2.7 percent to $54.08 at 9:58 a.m., the worst performance in the 83-company Standard & Poor’s 500 Financials Index. Morgan Stanley, Goldman Sachs Group Inc., Citigroup Inc. (C:US) and Bank of America Corp. (BAC:US) all lost at least 1.3 percent.
Wall Street Journal:
  • China’s Property Bubble Has Already Popped, Report Says. China’s great real-estate bust has begun, says Nomura. A combination of a huge oversupply of housing and a shortage of developer financing is producing a housing market downturn that could drive China’s GDP to less than 6% this year. “To us, it is no longer a question of ‘if’ but rather ‘how severe’ the property market correction will be,” three Nomura analysts wrote in a report released Monday.  And there isn’t much the government can do to head off problems.
Fox News: 
  • US aid indirectly helps Hamas, under deal with Palestinian Authority. The Palestinian Authority's announcement that it will send 3,000 police officers to Gaza as part of a unity agreement with Hamas could mean U.S. taxpayers are now at least indirectly helping an officially designated terror organization maintain law and order -- and its grip on power.
  • Rep. Gowdy named to lead Benghazi select committee. South Carolina Republican Rep. Trey Gowdy, a former federal prosecutor known for his aggressive style of questioning at congressional hearings, has been tapped to lead a select committee tasked with investigating the 2012 Benghazi attacks.
ZeroHedge: 
Wall Street All-Stars:
Business Insider: 
Reuters:
  • Target(TGT) removes CEO in wake of devastating cyber attack. Target Corp removed Chairman and Chief Executive Gregg Steinhafel on Monday in the wake of a devastating data breach that hurt the No. 3 U.S. retailer's profits, shook customer confidence in the company and prompted congressional hearings. 
Telegraph: 
China National Radio:
  • China Stats Bureau Sees GDP Over Estimated by ICP Report. The comparison figures underestimated China's price levels and overestimated GDP scale, citing a person with the National Bureau of Statistics. Figures about China didn't reflect the real situation, the person said.

Bear Radar

Style Underperformer:
  • Large-Cap Value -.02%
Sector Underperformers:
  • 1) Gaming -2.03% 2) Steel -1.74% 3) Homebuilding -1.33%
Stocks Falling on Unusual Volume:
  • BSFT, RLGY, KOS, TREX, LCUT, VCRA, MEMP, CLX, TGT, RBA, LXFT, TSN, MASI, KMPR, KOP, AZN, RAIL, OCIP, SXT, YELP, WFM, AMBA, PFE, MSG, MGA and MCC
Stocks With Unusual Put Option Activity:
  • 1) A 2) EXC 3) TGT 4) MMM 5) DHI
Stocks With Most Negative News Mentions:
  • 1) GM 2) CIT 3) WFM 4) NBR 5) HST
Charts:

Bull Radar

Style Outperformer:
  • Large-Cap Growth -.03%
Sector Outperformers:
  • 1) Biotech +1.02% 2) Telecom +.53% 3) Utilities +.47%
Stocks Rising on Unusual Volume:
  • BEAV, NDZ and GWPH
Stocks With Unusual Call Option Activity:
  • 1) RMD 2) NKE 3) HRB 4) TBT 5) GDXJ
Stocks With Most Positive News Mentions:
  • 1) FDS 2) AMZN 3) AAPL 4) CRM 5) NGVC
Charts:

Monday Watch

Weekend Headlines 
Bloomberg:
  • Ukraine Unrest Flares as Kiev’s Control Slips. Ukraine pursued an offensive to dislodge rebels from its eastern industrial heartland as violence that’s spread to its remaining southern Black Sea gateway threatens to loosen Kiev’s control of the regions. Troops in the Donetsk area, near the Russian border, took back a television tower overnight that had been seized by pro-Russian forces, Interior Minister Arsen Avakov said on his Facebook account. Fighting in Kramatorsk, in northern Donetsk, left seven people dead, the local website Kramatorsk.info said. Clashes continued in Odessa today. There is a “real war and this is the truth,” Prime Minister Arseniy Yatsenyuk said in an interview with BBC. The conflict is “due to Russian aggression and due to Russian-led protesters.”
  • Ukraine Presses Assault on Rebels With Warning of ‘War'. Ukrainian forces pressed their assault on separatists today and the head of the anti-terrorist center warned eastern regions are “essentially” at war, even as OSCE hostages were released. The Ukrainian anti-terrorist operation in the Donetsk region left five dead and 12 wounded, said the center’s chief, Vasyl Krutov. Government forces secured Slovyansk as operations in Kramatorsk continued, he said. Another 42 people were killed and 125 were injured in a building fire and street battle in Odessa that began last night when pro-Russians attacked marching football fans and a pro-Ukrainian rally. “What is happening in the east is not a short-term action, this is essentially a war,” Krutov said today.
  • Dozens Killed in Ukraine Fire as Clashes Erupt in Odessa. Dozens were killed in Ukraine after a building in Odessa was set ablaze during clashes and government forces attacked separatists near the Russian border in one of the deadliest days since the Ukrainian conflict erupted. The violence reached Odessa, where the government of Ukraine’s third-largest city said more than 40 people died and 174 were injured in a building fire and street battle that started when pro-Russian protesters in the port city attacked a rally in favor of a unified country. Earlier, Interior Minister Arsen Avakov said government units had advanced on the eastern city of Slovyansk to drive out militants and free hostages. “We’re ready to hold talks with protesters or their representatives,” Avakov said yesterday on the government website as troops surrounded Slovyansk. “But terrorists and armed separatists will only get the inevitable payback.” 
  • China Slowdown Weighs on Indonesia’s Export Outlook, Basri Says. China’s economic slowdown is weighing on the outlook for Indonesia’s exports even as the Southeast Asian nation’s trade balance improves, Finance Minister Chatib Basri said. “What we need to watch carefully is the slowdown in China,” Basri said May 2 in an interview with Bloomberg News in Astana, Kazakhstan, where he is attending the Asian Development Bank’s annual meeting. The slower pace of growth in Asia’s largest economy is the biggest concern for Indonesia’s exports this year, he said. 
  • China’s Stocks Fall on Holiday Home Sales, Manufacturing Report. China’s stocks fell, led by property and metal companies, after weaker-than-estimated manufacturing data and a plunge in home sales spurred concern that economic growth will slow. Poly Real Estate Group Co. and Gemdale Corp. dropped at least 3 percent after China Business News reported that new home sales tumbled 47 percent to a four-year low during the May Day holiday. Aluminum Corp. of China Ltd., the nation’s biggest producer of the lightweight metal, declined to the lowest level since July. The final reading of a purchasing managers’ index compiled by HSBC Holdings Plc and Markit Economics was at 48.1, compared with a preliminary reading of 48.3. The Shanghai Composite Index (SHCOMP) slid 0.8 percent to 2,009.57 at 9:59 a.m.
  • Asian Stocks Fall as China Manufacturing Misses Estimates. Asian stocks fell amid low trading volumes after a private gauge of Chinese manufacturing contracted for a fourth month, missing analysts’ estimates. China Longyuan Power Group Corp. sank 2.5 percent, leading energy companies lower in Hong Kong. Westpac Banking Corp., Australia’s second-biggest lender by market value, slid 1.4 percent in Sydney even as first-half cash profit grew. HTC Corp. soared 5.7 percent in Taipei as investors awaited a conference call where the smartphone maker is expected to give a forecast for second-quarter profit. The MSCI Asia Pacific excluding Japan Index slipped 0.4 percent to 473.75 at 10:31 a.m. in Hong Kong, following three weeks of losses.
  • Gold Extends Climb to Three-Week High as Ukraine Spurs Demand. Gold jumped to the highest level in almost three weeks, extending its biggest advance in a month, as conflict in Ukraine escalated. Bullion for immediate delivery rose as much as 0.7 percent to $1,308.40 an ounce, the highest level since April 15, and was at $1,306.24 by 9:28 a.m. in Singapore, according to Bloomberg generic pricing. Gold climbed 1.2 percent on May 2, the biggest increase since April 4. Metal for June delivery gained 0.2 percent to $1,305.80 an ounce on the Comex in New York.
  • IRS Probing Caterpillar(CAT) Parts Deals Examined by Senators. The Internal Revenue Service is challenging Caterpillar Inc. (CAT) on overseas transactions involving its spare-parts business, the company disclosed yesterday in a regulatory filing. The transactions were the focus of a congressional hearing last month at which Senator Carl Levin, a Michigan Democrat, said Caterpillar had made a “paper change” to book U.S. profits in Switzerland that saved the company $2.4 billion in U.S. taxes from 2000 to 2012. 
Wall Street Journal:
  • Borrowing Cash to Buy Complex Assets Is In Vogue Again. Banks Are Offering Leverage to Investors in CLOs Ahead of Rules That Limit Holdings. Banks again are doling out money to hedge funds and other investors to finance purchases of complex debt securities, returning to a practice that helped fuel the debt boom ahead of the financial crisis. RBC Capital Markets, Société Générale SA and Wells Fargo & Co. are among the banks offering to let investors borrow money, also known as providing leverage, to buy collateralized loan obligations, say investors and bankers. CLOs...
Zero Hedge:
Business Insider:
Rolling Stone:
Reuters:
Financial Times:
  • IMF’s José Viñals warns on eurozone bond market. A top IMF official has warned that the rally in eurozone bond markets risks ending in disappointment, with investors now lending to governments at rates that assume the region’s return to full health will be glitch free. 
  • Smaller China banks step up shadow lending activity. Smaller Chinese banks have ramped up their shadow lending activity, adding to the financial risks that threaten to trip up the world’s second-biggest economy. The 2013 results of unlisted banks, published over the past week, reveal that city-based lenders have been among the most aggressive in China in using complex credit structures to evade regulatory controls and issue higher-yielding loans.
Bild Zeitung:
  • France's Valls Call to Weaken Euro Attacked by Bundesbank. "We need a clear change, making our currency an instrument for for economic growth and jobs, an instrument that serves people," French Prime Minister Manuel Valls told French Young Socialists at weekend meeting. France is reverting back to the mentality of the 1970s when its currency lacked stability of later decades, citing a senior Bundesbank official.
NZZ am Sonntag:
  • U.S. Seeks Guilty Plea From Credit Suisse. Credit Suisse received demands in past couple of weeks from U.S., including guilty plea, names of American tax evaders with Credit Suisse accounts, citing a person familiar with the matter.
HKET:
  • Some Chinese Property Trusts May Face Default Risk. An estimated $101b of property trusts to reach maturity this year, citing Haitong Securities. Property trusts involving small- and medium-sized developers may face payment difficulties, citing people in the industry familiar with the matter. Small- and medium-sized developers under funding pressure as property market cools, transaction volume falls and banks tighten lending to real estate companies, they said.
Weekend Recommendations
Barron's:
  • Bullish commentary on (RF), (AWK), (DHR), (RXN), (MUR), (HTZ) and (HDS).
  • Bearish commentary on (SUNE) and (TWTR).
Night Trading
  • Asian indices are -1.0% to unch. on average.
  • Asia Ex-Japan Investment Grade CDS Index 127.50 unch.
  • Asia Pacific Sovereign CDS Index 89.75 unch.
  • FTSE-100 futures n/a.
  • S&P 500 futures -.13%.
  • NASDAQ 100 futures -.13%.
Morning Preview Links

Earnings of Note

Company/Estimate
  • (TSN)/.63
  • (PFE)/.55
  • (OXY)/1.70
  • (SYY)/.40
  • (APC)/1.15
  • (SMG)/1.97
  • (AIG)/1.07
  • (THC)/-.14
  • (VNO)/1.27
  • (RGR)/1.12
  • (ICPT)/-.75
Economic Releases 
9:45 am EST
  • The Final Markit US Services PMI for April is estimated at 54.5 versus a prior estimate of 54.2. 
10:00 am EST
  • The ISM Non-Manufacturing Composite for April is estimated to rise to 54.0 versus 53.1 in March.
Upcoming Splits
  • (TREX) 2-for-1
Other Potential Market Movers
  • The RBA decision, Eurozone PPI, China HSBC PMI and the (BEAV) investor meeting could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by real estate and financial 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 week.

Sunday, May 04, 2014

Weekly Outlook

U.S. Week Ahead by MarketWatch (audio)
Wall St. Week Ahead by Reuters.
Stocks to Watch Monday by MarketWatch.
Weekly Economic Calendar by Briefing.com.

BOTTOM LINE: I expect US stocks to finish the week modestly lower on Russia/Ukraine tensions, rising emerging markets/European debt angst, yen strength, technical selling and earnings concerns. My intermediate-term trading indicators are giving neutral signals and the Portfolio is 50% net long heading into the week.