Stocks Rising into Final Hour on Central Bank Hopes, Less Emerging Markets/Eurozone Debt Angst, Short-Covering, Energy/Gaming Sector Strength

Broad Equity Market Tone:

• Advance/Decline Line: Modestly Higher
  

• Sector Performance: Most Sectors Rising
  

• Volume: Light

• Market Leading Stocks: Underperforming

Equity Investor Angst:

• Volatility(VIX) 11.76 +.68%

• Euro/Yen Carry Return Index 144.41 -.05%

• Emerging Markets Currency Volatility(VXY) 6.97 -1.27%

• S&P 500 Implied Correlation 55.34 +.31%

• ISE Sentiment Index 99.0 -2.94%

• Total Put/Call .68 -24.44%

• NYSE Arms .90 -17.56% 

Credit Investor Angst:

• North American Investment Grade CDS Index 62.21 -1.13%

• European Financial Sector CDS Index 72.52 -.32%

• Western Europe Sovereign Debt CDS Index 34.86 -.56%
• Asia Pacific Sovereign Debt CDS Index 79.72 -.75%

• Emerging Market CDS Index 246.32 -2.30%

• China Blended Corporate Spread Index 348.68 +.77%
• 2-Year Swap Spread 13.0 +.5 basis point

• TED Spread 19.75 unch.

• 3-Month EUR/USD Cross-Currency Basis Swap -8.25 +.25 basis point

Economic Gauges:

• 3-Month T-Bill Yield .03% unch.

• Yield Curve 208.0 +1.0 basis point

• China Import Iron Ore Spot $95.70/Metric Tonne -1.14%

• Citi US Economic Surprise Index-2.90 -4.0 points

• Citi Emerging Markets Economic Surprise Index -19.30 unch.

• 10-Year TIPS Spread 2.23 +2.0 basis points

Overseas Futures:

• Nikkei Futures: Indicating +49 open in Japan

• DAX Futures: Indicating +11 open in Germany

Portfolio: 

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

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

• Market Exposure: Moved to 75% Net Long

Today's Headlines

Bloomberg:

• Rebels Kill 14 Downing Ukraine Chopper as Russia Sees War. Pro-Russian rebels downed a military helicopter in eastern Ukraine, killing 13 troops and a general, as an adviser to President Vladimir Putin accused the U.S. of pushing the world toward war through proxies in Kiev. Insurgents shot down an Mi-8 transport chopper with a shoulder-fired missile amid heavy fighting in Slovyansk, 100 miles (160 kilometers) from the Russian border, Speaker Oleksandr Turchynov told parliament today. They also attacked a military base near Luhansk, according to the National Guard. Russia demanded Ukraine halt its “fratricidal war” and withdraw troops from the mainly Russian-speaking regions of the east after separatists suffered the heaviest casualties of their campaign. Western countries should use their influence to stop Ukraine from “sliding into a national catastrophe,” the Foreign Ministry in Moscow said on its website.
• Russia Sanctions Threat Seen Abating Amid Recession Risk. Russia is less likely to face further sanctions from the U.S. and the European Union as the government is sending conciliatory signals toward Ukraine, a Bloomberg survey of economists showed. The U.S. will refrain from escalating punitive measures, according to 66 percent of respondents in a survey of 32 economists, compared with 28 percent last month. The EU will hold off on sanctions according to 84 percent, up from 78 percent in April. The probability of the Russian economy slipping into recession in the next 12 months remained at 50 percent, according to the median forecast in a separate survey. 
• China Threatens Further Action Against U.S. Over Hacking Dispute. China said it will take further action against the U.S. for prosecuting five of its military officers for alleged hacking, saying it has evidence its companies have also been hacked. Online attacks from a “specific country” have targeted Chinese companies, its military and important websites, Ministry of National Defense spokesman Geng Yansheng said. Geng didn’t specify the country in remarks posted on the ministry’s website today in response to a question about the indictment. 
• Bond Surge Worldwide Drives Index Yield to One-Year Low. A worldwide bond-market surge pushed yields to the lowest levels in a year on growing evidence central banks can keep stimulating economic growth without igniting inflation. Treasury 10-year note yields fell to the least since June. A rally yesterday drove the yield on the Bloomberg Global Developed Sovereign Bond Index to 1.28 percent, the lowest since May 2013. Australia’s (GACGB10) 10-year yield dropped to an 11-month low, Japan’s slid to the least in 12 months, while European bond yields were close to the lowest since the formation of the region’s shared currency. The U.S. sold $29 billion of seven-year notes at the lowest yield since October.
• Copper Drops From 11-Week High AMid Demand Concerns. Copper fell from an 11-week high in London on signs of slowing economic growth in China and the U.S., the biggest users of the metal. U.S. gross domestic product fell at a 1 percent annualized rate in the first quarter, a bigger drop than economists surveyed by Bloomberg projected, government figures showed today. A purchasing managers index due later this week may show little acceleration this month in Chinese manufacturing after the gauge grew less than estimated in April. Copper has lost 6.4 percent this year amid signs of slowing economies.
• Obama Seeks Climate Legacy as Coal-State Democrats Cringe. Obama now is set to release new limits on greenhouse gas emissions by power plants as early as next week. That comes atop the unveiling of a National Climate Assessment in May and executive actions including promoting renewable fuels and building better defenses against extreme weather. Liberated from re-election politics, he’s freer to speak about the challenges of a warming planet and is using his bully pulpit to create urgency on an issue that most Americans rank as a low priority, the aides said. The expansive action is alarming some in the business community, who say the administration’s policies will hurt the economy. “This administration is setting up the next energy crisis in this country,” said Laura Sheehan, a spokeswoman for the American Coalition for Clean Coal Electricity in Washington. “They’re not looking at the long-term consequences.” Obama also faces push-back from some within his own party, who warn that tighter regulations could hamper Democratic candidates in areas where coal is a major source of jobs. Democrats in Kentucky and West Virginia already are distancing themselves from the president’s energy policies, highlighting their opposition to a “war on coal” on the campaign trail. 
• Consumer Comfort in U.S. Falls to Lowest Level Since November. Consumer confidence declined last week to the lowest level since November as Americans’ views of their finances and the buying climate weakened. The Bloomberg Consumer Comfort Index fell to 33.3 in the period ended May 25 from 34.1 the prior week. A measure of personal finances retreated for the third time in four weeks, and a gauge of whether this is a good time to buy goods and services dropped to the lowest point since mid-February.
• Credit Trader’s Shift to Rates Shows Where Anxieties Lie. Rate derivatives have become more popular than ever for wagering on whether borrowing costs will rise or fall as the Federal Reserve scales back its unprecedented stimulus. The amount of over-the-counter interest-rate swaps has swelled 30 percent since the end of 2009, to a record notional $584.4 trillion as of December, according to a May 23 CME Group Inc. (CME) report. At the same time, the volume of privately negotiated credit-default swaps has plunged to a notional $21 trillion, 64 percent below the peak of $58.2 trillion in December 2007.

Wall Street Journal:

• DOJ Opened At Least 10 Probes into Bank Processing Activities. 'Operation Choke Point' Disclosed in Government Memo. The U.S. Department of Justice has opened at least 10 civil and criminal investigations into whether banks and payment processing firms helped enable fraudulent activity, according to an internal Justice Department memo viewed by The Wall Street Journal. More than 850 pages of internal documents on the DOJ's probe of alleged fraud in the financial industry were obtained by the House Oversight and Government Reform Committee. Ms. Frimpong, in her memo, wrote that the government had the opened civil investigations into 10 banks and payment processors and was in settlement talks with three of them.
• Doctors' War Stories From VA Hospitals. Administrators limited operating time so that work stopped by 3 p.m. With the recent revelations about the disgraceful treatment of patients by the Veterans Affairs hospitals, the public is discovering what the majority of doctors in this country have long known: The VA health-care system is a disaster.
• Justice Dept. Seeks More Than $10 Billion Penalty From BNP Paribas. French Bank Faces Criminal Probe of Alleged Sanctions Violations. 
• Tyson(TSN) Enters Bidding for Hillshire Brands With $6.1 Billion Offer. Proposal Tops Offer Made by JBS's Pilgrim's Pride, Setting Up Meatpacker Slugfest.

MarketWatch.com:

• Hedge fund assets to hit $5.8 trillion by 2018: Citi survey. The hedge fund industry will double its assets in the next four years to nearly $6 trillion by diversifying products and giving retail investors more access, according to a new survey. Traditional hedge fund clients are high-net-worth individuals, but more and more retail investors will have access to the asset class, according to the latest Citi Investor Services Survey.

Fox News: 

• Obama under bipartisan pressure to oust Shinseki on heels of IG report. President Obama is coming under heavy pressure from both sides of the aisle following a scathing inspector general report to tackle the problems at the Department of Veterans Affairs head-on -- first, by relieving VA Secretary Eric Shinseki of his command. More than a half-dozen Democratic senators are now calling for Shinseki's resignation, since the Office of Inspector General released an interim report on Wednesday finding "systemic" problems with clinics lying about patient wait times.

CNBC:

• Politicians fight back as hedge funders ramp up election spending. (video)
• Fed's Lacker: Expect a positive GDP reversal in the second quarter. (video) Richmond Fed Reserve President Jeffrey Lacker has long called for a narrower and more restrained role for the central bank, arguing that it should shift back to a more traditional and less interventionist role.
• Ford(F) recalls 915K Ford Escape, Mercury Mariner cars in North America.

ZeroHedge:

• Meet Directive 3025.18 Granting Obama Authority To Use Military Force Against Civilians.
• Over A Thousand Soldiers Killed As Ukraine Fighting Escalates, Russian Media Reports.
• 10Y Treasury Yield Hits 2.40%. (graph)
• Someone Is Dead Wrong About The Economy.
• Texas VA Run Like A "Crime Syndicate" Claims Whistleblower.
• "Pent-Up" Pending Home Sales Demand Missing; Down 9.4% YoY. (graph)
• US Economy Shrank By 1% In The First Quarter: First Contraction Since 2011. (graph)
• Initial Claims Drop Near Cycle Low "As Good As It Gets" Levels.

ValueWalk:

• 500 Largest Hedge Fund Managers Control 90% Of AUM. Preqin Research highlights the 505 hedge fund managers with more than $1bn in AUM currently manage $2.39tn of the industry’s $2.66tn total assets, but account for just 11% of active firms.
• Derivatives Worldwide Hit 710 Trillion, According To BIS Study. The Bank for International. Settlements (BIS) just published a statistical study on the amount of derivatives worldwide at the end of 2013, and they reach the astronomical amount of $710 Trillions ($710,000,000,000,000). For comparison purposes, the United States GDP in 2013 amounts to $16 Billion, or 44 times less. And this mass of derivatives beats by 20% the preceding record, dating just before the 2008 crisis… We hear a lot about bubbles these days, in the stock market, the bond market or in the commodities market, but this one is without a doubt the greatest one.

Reuters: 

• Russia tensions to cut emerging market flows -global bank group. Private capital flows to emerging markets are likely to drop to their lowest level in five years in 2014 as money going to Russia dries up due to Moscow's conflict with Ukraine, a global financial industry group forecast on Thursday.

Folha de S.Paulo:

• Brazil Govt Sees Possibility of 2014 GDP Growth Below 2%. Economic growth has become main concern for govt, citing President Dilma Rousseff's aides it didn't identify. Govt sees possibility of trade deficit this year. Investments may be below 2013 level. Govt sees no room for fiscal expansion to stimulate economy; inflation still high.

Bear Radar

Style Underperformer:

• Large-Cap Value +.05%

Sector Underperformers:

• 1) Coal -.60% 2) Disk Drives -.51% 3) Restaurants -.45%

Stocks Falling on Unusual Volume:

• RXN, STON, FN, GNRC, BAH, SC, TOUR, RCAP, REGI, TECD, DG, CPRT, KORS, UNT, CM, ARMK, BOBE, TW, CSTE, MTZ, BWS, ANN, NJR and ENB

Stocks With Unusual Put Option Activity:

• 1) DG 2) ZTS 3) TWX 4) F 5) ORCL
  

Stocks With Most Negative News Mentions:

• 1) C 2) SLXP 3) DG 4) DLR 5) AWAY
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Small-Cap Growth +.23%

Sector Outperformers:

• 1) Alt Energy +1.26% 2) Gold & Silver +1.19% 3) Tobacco +.96%
  

Stocks Rising on Unusual Volume:

• HSH, AMSG, PANW, PLKI, ANIK, ANF, QSII, SZYM, TSN, MELI, CLNE, WB, SUNE, CLVS, SCTY, ANIK and ZOES

Stocks With Unusual Call Option Activity:

• 1) ACT 2) RSH 3) PANW 4) TSN 5) TLT

Stocks With Most Positive News Mentions:

• 1) ANF 2) TSN 3) BIIB 4) AMZN 5) BIIB
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Thursday Watch

Evening Headlines 
Bloomberg:

• Russia Urges ‘Emergency Steps’ Over Ukraine After Rebel Losses. Russia called for unspecified “emergency” measures to halt the violence in eastern Ukraine after separatist militias suffered the heaviest casualties of their insurgency. “It’s necessary to take emergency steps to stop the bloodshed and start an inclusive internal Ukrainian dialogue,” Foreign Minister Sergei Lavrov told his German counterpart Frank-Walter Steinmeier by phone yesterday, according to the ministry’s website. “There’s no excuse” for military action in the southeastern part of the country, Lavrov said. Ukraine stepped up air patrols over the eastern city of Donetsk yesterday as a convoy of pro-Russian rebels moved through the city with an anti-aircraft gun in tow, threatening renewed violence after dozens of militants were killed in a government operation to retake the area’s biggest airport.

• Free Toasters for China's Depositors? by A. Gary Shilling. In part two of this four-part series, I wrote about China’s shadow banks and the government’s efforts to assert more control over them.

• Japan Retail Sales Fall at Record Pace After Sales-Tax Rise. Japan’s retail sales dropped at the fastest pace in at least 14 years last month after the first consumption-tax increase since 1997 depressed consumer spending. Sales in April declined 13.7 percent from the previous month, the trade ministry reported today, more than the median forecast of an 11.7 percent decline in a Bloomberg News survey of 11 economists.

• Thais Say Facebook(FB) Goes Down as Junta Releases Red Shirts. Internet users in Thailand reported temporarily losing access to Facebook Inc. (FB), sparking speculation the social media site had been blocked by the military. At the same time, the junta that seized power a week ago released leaders from the Red Shirt movement opposed to the coup.

• EU Firms in China Worried About Tech Security, Poll Finds. The European Union Chamber of Commerce in China said its members are concerned about the security of their technology systems in the country, citing a poll conducted after the U.S. indicted five Chinese military officials for allegedly stealing corporate secrets. Eighty of 100 companies responding to a survey are concerned about their information-technology systems in China, while 53 percent are more concerned about security in the country than in other regions, the EU Chamber said in an e-mail. Most members have noticed increased online censorship or slower Internet speeds in China in the past few weeks, according to the survey.

• Asian Stocks Fall as Japan Retail Sales Slump in April. Asian stocks fell, with the regional benchmark index retreating from a six-month high, as investors weighed a worse-than-estimated drop in Japan’s retail sales before a report that’s expected to show the U.S. economy contracted last quarter. Fast Retailing Co. (9983), Asia’s biggest clothing seller, slipped 1.1 percent in Tokyo. BHP Billiton Ltd., the world’s No. 1 mining company, dropped 1.6 percent in Sydney as copper futures declined. Samsung Electronics Co., the largest maker of smartphones, climbed 1.5 percent in Seoul after unveiling a prototype health-monitoring wristband. The MSCI Asia Pacific Index (MXAP) lost 0.1 percent to 141.72 as of 9:37 a.m. in Tokyo, after yesterday reaching its highest level since Nov. 29.

Wall Street Journal: 

• Ziffs Shut Down Hedge Fund, Shift Way Wealth Is Managed. Brothers Had Already Begun Winding Down Other Fund.

• Lawyers Push to Corral GM Recall Cases. Panel to Rule If Single Court Should Manage Product Liability Suits.

• Doubling Down on a Muddled Foreign Policy. The president has somehow managed to combine the worst features of isolationism and multilateralism. 

Fox News: 

• Watchdog finds ‘systemic’ problems at VA, Shinseki faces bipartisan calls to resign. The official watchdog for the Department of Veterans Affairs claimed in a scathing report that the department has a "systemic" problem with clinics lying about patient wait times, as lawmakers on both sides of the aisle joined calls for Secretary Eric Shinseki to resign.

• Lawmakers and interest groups clash as Obama prepares to announce performance standard for power plants. Lawmakers and Washington interest groups are engaged in a battle over whether looming EPA rules will help or hurt as President Obama prepares to announce a highly anticipated performance standard for power plants June 2.

CNBC:

• Apple(AAPL) to acquire Beats Electronics for $3 billion. (video) Apple will acquire headphone maker Beats Electronics for $3 billion, Apple said on Wednesday. The deal is expected to close in the fiscal fourth quarter. Apple will pay $2.6 billion in cash and another $400 million in equity. It will also continue to use the Beats brand. 

• China's millionaire machine slows. (video) China's millionaire machine has slowed, suggesting that the country's economic weakness is reaching the top of the economy.

Zero Hedge:

• What Happened The Last Time Bonds & Stocks Were So Disconnected? (graph)

• Chart Of The Day: Global Youth Unemployment.

• NYPD Prepares To Use Drones As CA License Plate Readers Stir Controversy.

• Commuters Herded Like Cattle As China Escalates Its Own "War On Terror".

• Bacon Prices To Soar Even More: The Pig Diarrhea Virus Is Back For Round Two.

Business Insider:

• A Staggering 2.1 Billion People Worldwide Are Overweight Or Obese.

• Putin's Invitation To A World War II Ceremony Has Western Leaders Freaking Out.

• Microsoft's(MSFT) CEO Blew It At The Code Conference, Industry Insiders Whisper.

Reuters:

• Brazil pauses interest rate hikes despite high inflation. Brazil left its benchmark interest rate unchanged on Wednesday, pausing one of the world's longest-running tightening cycles to avoid choking its weakening economy despite high inflation. In a unanimous decision, the central bank's monetary policy committee, known as Copom, kept its Selic rate at 11 percent, breaking a streak of nine consecutive hikes as expected by a majority of analysts and market traders.

• Palo Alto(PANW) revenue rises 49 pct, settles lawsuits with Juniper. Cyber security software maker Palo Alto Networks Inc reported a better-than-expected 49 percent jump in quarterly revenue as it added more customers, and said it settled patent litigation with network gear maker Juniper Networks Inc.

Obama takes on coal with first-ever carbon limits
Read more at http://www.philly.com/philly/news/politics/20130919_ap_0f857b20e0c144a5a1e1b9dddc9f9d72.html#YRThyDOhArykUeYy.99

Telegraph:

• Europe has an even bigger crisis on its hands than British a exit. British people will vote to leave the EU unless offered a new dispensation, writes Ambrose Evans-Pritchard.

The Australian: 

• Iron ore price slips further. The iron ore price has fallen further as fears over weakened steel demand in China continue to weigh on the commodity. Benchmark iron ore for immediate delivery to the port of Tianjin in China is trading at $US96.80 a tonne, down from $US98.10 in the previous session. Last week the iron ore price crashed through the $US100 a tonne mark for the first time in nearly two years and it currently sits at its lowest point since September 13, 2012 when it traded at $US96.10 a tonne. Credit Suisse this week warned that even if iron ore manages some stability in the near term -- or even modest gains -- the second half of the year is likely to see the commodity price fall below 2012's low of $US87 a tonne.

Shanghai Securities News:

• China Asks Banks to Control Worsening Bad Loan. Chinese regulator asked banks to control worsening ratios of outstanding bad loans and conduct stress tests. The regulator said in an internal meeting that banks asset risks are "under control" while spreading to different regions and industries, the report said.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -.25% to +.25% on average.

• Asia Ex-Japan Investment Grade CDS Index 110.50 -4.5 basis points.

• Asia Pacific Sovereign CDS Index 80.25 -.75 basis point.

• FTSE-100 futures +.15%.

• S&P 500 futures +.05%.

• NASDAQ 100 futures  +.03%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (TECD)/.92

• (SAFM)/1.70

• (BNNY)/.34

• (PLL)/.83

• (LGF)/.43

• (BLOX)/.03

• (ESL)/1.30

Economic Releases
8:30 am EST

• 1Q GDP is estimated to fall -.5% versus a prior estimate of a +.1% gain.

• 1Q Personal Consumption is estimated to rise +3.1% versus a prior estimate of a +3.0% gain.

• 1Q GDP Price Index is estimated to rise +1.3% versus a prior estimate of a +1.3% increase.

• 1Q Core PCE is estimated to rise +1.3% versus a prior estimate of a +1.3% increase.

• Initial Jobless Claims are estimated to fall to 318K versus 326K the prior week.

• Continuing Claims are estimated to fall to 2650K versus 2653K prior.

10:00 am EST

• Pending Home Sales for April are estimated to rise +1.0% versus a +3.4% gain in March.
  

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory decline of -118,180 barrels versus a -7,226,000 barrel decline the prior week. Gasoline supplies are estimated to rise by 190,910 barrels versus a 970,000 barrel decline the prior week. Distillate supplies are estimated to rise by +445,450 barrels versus a +3,399,000 barrel gain the prior week. Finally, Refinery Utilization is estimated to rise by +.33% versus a -.1% decline the prior week.

Upcoming Splits

• None of note

Other Potential Market Movers

• The Fed's Pianalto speaking, Fed's Mester speaking, Japan CPI, $29B 7Y T-Note auction, weekly Bloomberg Consumer Comfort Index and the (AKS) annual meeting could impact trading today.

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

Stocks Slightly Higher into Final Hour on Less Eurozone Debt Angst, Short-Covering, Technical Buying, Transport/Energy Sector Strength

Broad Equity Market Tone:

• Advance/Decline Line: Lower
  

• Sector Performance: Mixed
  

• Volume: Below Average

• Market Leading Stocks: Underperforming

Equity Investor Angst:

• Volatility(VIX) 11.65 +1.22%

• Euro/Yen Carry Return Index 144.57 -.37%

• Emerging Markets Currency Volatility(VXY) 7.07 +.14%

• S&P 500 Implied Correlation 55.47 -.04%

• ISE Sentiment Index 101.0 -22.31%

• Total Put/Call .91 +28.17%

• NYSE Arms 1.05 -5.41% 

Credit Investor Angst:

• North American Investment Grade CDS Index 62.59 +.29%

• European Financial Sector CDS Index 72.75 -2.47%

• Western Europe Sovereign Debt CDS Index 35.05 -1.39%

• Asia Pacific Sovereign Debt CDS Index 81.43 +.62%

• Emerging Market CDS Index 252.89 -3.24%

• China Blended Corporate Spread Index 346.0 -.27%

• 2-Year Swap Spread 12.5 -3.75 basis points

• TED Spread 19.75 -.25 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -8.5 +.75 basis point

Economic Gauges:

• 3-Month T-Bill Yield .03% unch.

• Yield Curve 207.0 -10.0 basis points

• China Import Iron Ore Spot $96.80/Metric Tonne -1.33%

• Citi US Economic Surprise Index 1.90 -.1 point

• Citi Emerging Markets Economic Surprise Index -19.30 +1.1 points

• 10-Year TIPS Spread 2.21 unch.

Overseas Futures:

• Nikkei Futures: Indicating -22 open in Japan

• DAX Futures: Indicating -2 open in Germany

Portfolio: 

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

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

• Market Exposure: 50% Net Long