Stocks Lower into Final Hour on Global Growth Fears, Earnings Outlook Concerns, Emerging Markets/US High-Yield Debt Angst, Transport/Homebuilding Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Substantially Lower
  

• Sector Performance: Almost Every Sector Declining
  

• Volume: Slightly Below Average

• Market Leading Stocks: Underperforming

Equity Investor Angst:

• Volatility(VIX) 15.75 +3.01%

• Euro/Yen Carry Return Index 138.82%

• Emerging Markets Currency Volatility(VXY) 10.87 -.91%

• S&P 500 Implied Correlation 60.29 +3.17%

• ISE Sentiment Index 163.0 +21.64%

• Total Put/Call 1.10 +13.4%

• NYSE Arms .95 -18.87% 

Credit Investor Angst:

• North American Investment Grade CDS Index 78.65 +1.13%

• America Energy Sector High-Yield CDS Index 1,107.0 +4.27%

• European Financial Sector CDS Index 69.97 +1.41%

• Western Europe Sovereign Debt CDS Index 18.81 +.03%

• Asia Pacific Sovereign Debt CDS Index 73.99 +2.91%

• Emerging Market CDS Index 326.85 +1.37%
  

• iBoxx Offshore RMB China Corporates High Yield Index 122.26 -.02%

• 2-Year Swap Spread 11.5 +.25 basis point

• TED Spread 31.75 unch.

• 3-Month EUR/USD Cross-Currency Basis Swap -27.5 +2.0 basis points

Economic Gauges:

• Bloomberg Emerging Markets Currency Index 71.83 -.43%
• 3-Month T-Bill Yield .02% +1.0 basis point

• Yield Curve 141.0 -1.0 basis point

• China Import Iron Ore Spot $51.50/Metric Tonne +.92%

• Citi US Economic Surprise Index -10.10 -2.4 points

• Citi Eurozone Economic Surprise Index 18.1 -2.2 points

• Citi Emerging Markets Economic Surprise Index -13.50 -.2 point

• 10-Year TIPS Spread 1.49 unch.
• # of Months to 1st Fed Rate Hike(Morgan Stanley) 5.40 -.05

Overseas Futures:

• Nikkei 225 Futures: Indicating +108 open in Japan 
• China A50 Futures: Indicating -46 open in China

• DAX Futures: Indicating +5 open in Germany

Portfolio: 

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

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

• Market Exposure: Moved to 25% Net Long

Today's Headlines

Bloomberg: 

• U.S. Rivalry With China Heats Up Over Vital Asia Shipping Lane. The moment the U.S. Navy sailed a warship into waters claimed by China in the South China Sea it gave President Xi Jinping a pretext to accelerate his country’s military presence in the disputed waterway, further placing the vital shipping lane at the heart of U.S.-China rivalry in the Pacific. The patrol by the USS Lassen prompted an angry response by Beijing and came just weeks after Xi met with President Barack Obama in Washington, where he said China “does not intend to pursue militarization” of the area. The decision to send in the warship -- the most direct attempt by the U.S. to challenge China over its island building in the waters -- may change that.  

• China's Top Graft Buster Turns Sights on Financial Industry. China’s top graft buster is turning its sights on the financial industry with plans to dig into organizations ranging from the world’s biggest bank to the regulator overseeing a volatile stock market. The People’s Bank of China, the nation’s five biggest lenders, sovereign-wealth fund China Investment Corp. and the banking, securities and insurance regulators are among 31 entities that will be inspected for possible misconduct or corruption.    

• Hitachi Construction Cuts Forecasts as Demand Slump Deepens. Hitachi Construction Machinery Co., Asia’s second-biggest maker of building equipment, cut its sales and profit targets for the year as the slowdown in China extends to the developed world. The company trails only Komatsu Ltd. in Japan’s construction equipment market and is among the world’s top suppliers of the large excavators and dump trucks used by miners. Both Komatsu and Hitachi Construction have been quick to warn on the impact of China’s slowdown, and in a statement Tuesday Hitachi signaled the slump is spreading. “ Sales are expected to fall short of the company’s previous forecast due to demand slowdown in developed countries and further slowdown in emerging markets,” Chief Financial Officer Tetsuo Katsurayama told reporters in Tokyo. For China, he said there are no signs of a recovery in demand. “We have a view that we won’t see a recovery in the second half,” he said.

• Stock Shock: The Threat to Global Growth If Equities Slide Again. That markets are skittish again and remain beneath their peaks nevertheless has economists debating how much power equities wield over global growth. The worrying answer is quite a bit, according to a report from Oxford Economics Ltd., which notes the recent slide in stocks is similar in scale to that seen in 1998.

• Is London’s Housing Bubble About to Burst? (video)

• Brazil Real Falls for Second Day on Renewed Concern Levy Leaving. Brazil’s real declined for a second day as President Dilma Rousseff’s government struggles to win support for measures to shore up the nation’s finances amid speculation Finance Minister Joaquim Levy could leave his post. The currency dropped less than 0.1 percent to 3.9088 per dollar at 12:41 p.m. in Sao Paulo, and was the most volatile among 31 major tenders tracked by Bloomberg. Rousseff’s aides are said to see former minister Antonio Palocci Filho as a candidate for finance minister if Levy leaves the position, according to a report in Valor Economico newspaper that didn’t say how it got the information.

• Emerging Stocks Decline Before Fed Meeting as Ruble Weakens. Emerging-market stocks fell with currencies before a Federal Reserve meeting as utility companies tumbled and lower oil prices dragged down energy producers. Russia’s ruble depreciated the most among its peers. Gazprom PJSC dragged Russian equities lower as oil prices declined before U.S. data forecast to show crude stockpiles expanded in the world’s biggest consumer. The ruble headed for a three-week low. Brazilian raw-material producers led the Ibovespa lower. Indian stocks dropped for a second day. Stocks fell to the lowest level in six weeks in Dubai, while Saudi Arabian shares retreated 3 percent. The MSCI Emerging Markets Index fell 0.7 percent to 861.51 at 11:03 a.m. in New York, dropping for a second day.

• Europe Stocks Fall for a Second Day as Earnings Miss, Oil Drops. (video) European stocks fell for a second day as some disappointing earnings reports cast doubt on the strength of the euro-area economic recovery, amid weak commodity and oil prices. Total SA and Royal Dutch Shell Plc slid at least 1.9 percent, contributing the most to a drop in energy stocks. Novartis AG pulled health-care shares down, falling 1.6 percent after reporting profit that missed estimates and agreeing to pay $390 million to settle claims that it paid kickbacks to some U.S. pharmacies. Anglo American Plc was among the biggest mining decliners, falling 5.7 percent. BASF SE dragged chemical shares lower, losing 4.7 percent after cutting its targets for sales and profit this year. The Stoxx Europe 600 Index slid 1.1 percent to 371.88 at the close of trading.

• Arch Coal(ACI) Ends Debt Exchange, Restructuring Talks Continue. Arch Coal Inc. terminated a debt-exchange offer that it initiated almost four months ago as disputes among creditors helped derail the deal that would have enabled the struggling coal miner to slash its $5.1 billion debt load. The company, which had extended the deadline six times, said the decision was based on opposition from a lender group and a pending law suit, among other factors, according to a company statement Tuesday. 

• IBM(IBM) Says the SEC Is Investigating Accounting for Revenue Recognition. IBM disclosed that the U.S. Securities and Exchange Commission is conducting a probe into the way the technology seller accounts for revenue recognition. International Business Machines Corp. fell 3.5 percent to $138.60 at 1:57 p.m. in New York. The Armonk, New York-based company said Tuesday in a filing that it learned in August that the SEC is looking into the accounting treatment of certain transactions in the U.S., the U.K. and Ireland.

• Fed Rate Hike Close? Economists Say Yes, Investors Say No. (video)

• Fed's Quest to Keep December Options Open: Decision Day Guide. Here’s what to look for when the Federal Open Market Committee releases its policy statement at 2 p.m. Wednesday in Washington following a two-day meeting. Economists don’t expect a rate rise and will scour the statement for clues on what the FOMC may do at its December meeting, amid betting the Fed will delay until next year. Fresh economic data has been mixed, at best, since officials met last month, when they left their benchmark federal funds rate near zero. Figures on U.S. jobs, retail sales, manufacturing, inventories and exports all disappointed, while new jobless claims and housing data -- for the most part -- have showed continued strength. The challenge for policy makers will be to keep their options open for a move this year, while acknowledging tepid data that could tilt the tone of the statement toward liftoff in 2016. 

• Cummins(CMI) Falls After Trimming Annual Forecast, Earnings Miss. Cummins Inc. fell after third-quarter profit trailed analysts’ estimates and the company reduced its annual sales forecast because of weakening demand for its heavy-duty engines. The company also said it’s cutting 2,000 jobs as part of a plan to save as much as $200 million a year. And Chief Financial Officer Pat Ward said on a conference call that Cummins will resume share buybacks this quarter. Its board authorized a $1 billion repurchase program in July 2014.

Wall Street Journal: 

• Chinese Firms Vie to Buy Starwood Hotels. Deal could be the largest-ever Chinese takeover of a U.S. company.

Fox News:

• Carson takes lead from Trump in new national poll. (video)

CNBC: 

• Chance of recession highest in two years: Survey. (video)

• Apple's(AAPL) best days are behind it, says top analyst. (video)

• Get ready for sub $40 oil: Expert. (video)

Zero Hedge:

• Washington's Syria "Strategy" In Complete Disarray As "Ally" Turkey Bombs US-Armed Rebels.

• Valeant(VRX) Hit With Downgrade Warning By S&P Which Sees "Reputational, Legal, And Regulatory Risks".

• Not "Off To The RACEs" - Ferrari Crashes Below IPO Price. (graph)

• Rent-A-Center(RCII) Stock Plummets For A Very Surprising Reason. (graph)

• Who's Really Isolated? Iran Set To Join BRICS Bank, Strengthen Ties With Brazil. (graph)

• Facebook(FB) Caught Secretly Lobbying For Privacy-Destroying "Cyber-Security" Bill.

• Is The Small-Cap Under-Performance A Big Deal? (graph)

• Boehner On Debt Ceiling Deal: Process "Stinks" But Alternative Was Default. (graph)

• Consumer Confidence Slides As Low Gas Prices No Longer Lift Sentiment. (graph)

• US Services Economy Tumbles To Weakest Since Weather-Crushed January. (graph)

• Why Did The Market Surge In October? Here Is The U.S. Treasury's Explanation. (graph)

• US Equities Give Up China Rate Cut Gains As Crude Plunges To $42 Handle. (graph)

• Case-Shiller Home Price Appreciation 'Stable' At Around 5% YoY. (graph)

• Don't Think The Status Quo Will Save You. (graph)

• Durable Goods Orders Tumble For 6th Consecutive Month As Core Capex Plunges Most Since 2009. (graph)

• "Smart Money" Sold Stocks For Third Consecutive Week To Corporate Buybacks, Scrambling Shorts. (graph)

Business Insider:

• Conservatives are in revolt over the Republican budget 'betrayal'.

• This recession indicator just collapsed to a 6-year low. (graph) An offbeat economic indicator is signaling a recession. The "McCulley indicator" — which measures "core" capex orders, or orders of capital goods excluding military orders and planes — is now at its lowest level since 2009. The indicator is named for former PIMCO managing director Paul McCulley, who views it as a leading recession indicator.

• US officials: Iran invited for the first time to next round of Syria talks.

• Walgreens(WAG) might buy Rite Aid(RAD), and the stock is going nuclear.

• Even the Kremlin's own evidence proves that Russia isn't focusing its Syria bombing on ISIS.

Bear Radar

Style Underperformer:

• Small-Cap Value -1.32%

Sector Underperformers:

• 1) Coal -19.1% 2) Oil Tankers -5.08% 3) Road & Rail -4.52%

Stocks Falling on Unusual Volume:

• RCII, GRUB, NTT, SAVE, MSTR, CMI, PLCE, CTS, CPLA, YRCW, RDN, ODFL, HIG, WSO, CAKE, AAN, IACI, KN, CAJ, DECK, HTLD, SKYW, MDSO, CTRP, TWOU, EQT, WBC, CHRW, AME, HURN, F, AGNC, CALM, UVE, FOGO, NCI, AXLL, EXP, PCAR, CIEN, GHL, MPLX, TMUS, TDW, JBLU, AI, CONN, ECHO, YELP, SKYW, LXK and LRN
  

Stocks With Unusual Put Option Activity:

• 1) EWT 2) KBH 3) CMI 4) M 5) HES
  

Stocks With Most Negative News Mentions:

• 1) GM 2) LVS 3) CYH 4) F 5) BTU
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Large-Cap Growth -.43%

Sector Outperformers:

• 1) HMOs +1.57% 2) Biotech +1.46% 3) Drugs +.67%
  

Stocks Rising on Unusual Volume:

• QUNR, TACO, OMG, IDTI, FCS, QSR, IPGP, AGIO, TXT, PCRX, UTHR and GLW

Stocks With Unusual Call Option Activity:

• 1) ACI 2) TSN 3) GRUB 4) SAVE 5) RAI
  

Stocks With Most Positive News Mentions:

• 1) IDTI 2) LMT 3) PFE 4) COH 5) NOC
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Morning Market Internals

NYSE Composite Index:

• Volume Running +10.2% Above 100-Day Average
• 1 Sector Rising, 9 Sectors Declining
• 24.4% of Issues Advancing, 72.7% Declining
• 31 New 52-Week Highs, 87 New Lows
• 35.6% of Issues Above 200-day Moving Average
• Average 14-Day RSI 46.3
• Vix 15.5
• Total Put/Call 1.17
• TRIN/Arms .97

Tuesday Watch

Evening Headlines 

Bloomberg:

• China’s Stocks Drop on Concern Slowing Economy to Hurt Profits. China’s stocks fell for the first time in four days, led by material and technology shares, amid concern the slowing economy is curbing profit growth. The Shanghai Composite Index declined 1.1 percent to 3,390.79 at 9:38 a.m. local time, as eight stocks retreated for each one that rose. Anhui Conch Cement Co., China’s biggest cement maker, slid 1.1 percent after third-quarter net income fell 40 percent from a year earlier. Leshi Internet Information & Technology Corp., which has more than tripled this year, slumped 2 percent. Official data on Tuesday showed industrial companies’ profits fell 0.1 percent in September.

• Iran's Man in New York Is Hunting for Billions of Dollars. Iran, by its own admission, needs $150 billion of investment annually for many years ahead to repair the damage from a decade of isolation. That’s a tall order for a country that, even when sanctions are finally lifted, will still be an opaque and scary place to most foreign investors.Enter Hamid Biglari. 

• Yen Strength Returns as Central Bank Meetings Spur Global Gloom.

• Asia Stocks Slip From Two-Month High as Investors Await Fed, BOJ. Asian stocks fell, with the regional benchmark index retreating from its highest in two months, as energy shares led losses and investors awaited policy decisions by the Federal Reserve and the Bank of Japan later in the week. The MSCI Asia Pacific Index lost 0.1 percent to 136.31 as of 9:02 a.m. in Tokyo after closing Monday at the highest since Aug. 18.

• Could Oil Prices Hit $20 a Barrel? (video)

• Distillate Dilemma: Oil's Biggest Downside Risk. (video) The yen held its first daily advance in almost two weeks as investors remained sidelined before the U.S. Federal Reserve and the Bank of Japan set monetary policy in coming days. Japan’s currency strengthened against all of its 16 major peers after a rally in U.S. stocks stalled Monday ahead of the conclusion of the Fed’s meeting Wednesday, when it will release an economic assessment. The BOJ sets policy Friday. The New Zealand dollar dropped after the nation’s trade deficit widened to NZ$1.22 billion ($828 million) in September, exceeding NZ$825 million forecast in a Bloomberg survey. The Reserve Bank of New Zealand meets Thursday.

• Iron Ore Sinks Back Toward $50 as Supply Gains Meet Weak Demand. Iron ore prices are on the slide again, sinking back toward $50 a metric ton after six days of losses as expanding low-cost supplies and sputtering demand in China spur concern a global glut will persist into 2016. Ore with 62 percent content delivered to Qingdao lost 1.1 percent to $51.03 a dry ton on Monday, the lowest since July 16, according to Metal Bulletin Ltd. The raw material -- which bottomed at $44.59 on July 8, a record in daily price data dating back to May 2009 -- is headed for the first monthly loss since July. Miners’ shares declined in Australia, led by Fortescue Metals Group Ltd. 

Wall Street Journal:

• The Fed Strives for a Clear Signal on Interest Rates. As 2016 approaches, pressure is on the central bank and Janet Yellen to better manage market expectations. Federal Reserve officials are widely expected to announce Wednesday that short-term interest rates will remain near zero, leaving mid-December as the central bank’s last chance to raise rates this year. The timetable poses twin challenges for Fed Chairwoman Janet Yellen: Deciding whether the U.S. economy is ready for an interest-rate increase, and signaling central bank intentions without causing further market confusion.

• White House and Boehner Close In on Budget Deal. Congressional leaders are said to be nearing an agreement that would also raise debt limit. The White House and congressional leaders neared a deal Monday on a two-year budget plan that also would raise the federal debt limit, according to lawmakers and aides.

• Goldman(GS) in Talks on $50 Million Fine Over Release of New York Fed Secrets. A former employee allegedly shared sensitive supervisory materials.

• The Dangers Ahead if Tech Unicorns Get Gored. Some venture capitalists are sounding the alarm about mega-startups and the terms under which these tech companies are financed.

• Hillary Clinton Flunks Economics. She says we’re better off with Democrats in the White House. Is that so? There can be no doubt now: The U.S. economy is struggling, inequality is on the rise and too many Americans feel uncertain about their future.

• The Fed Has Hurt Business Investment. QE is partly to blame for record share buybacks and meager capital spending. On his recent book tour, former Federal Reserve Chairman Ben Bernanke stated that low long-term interest rates are not the Fed’s doing. Low rates result from a shortage of good capital projects. If there were good investment projects, he explained, capital would flow and interest rates would rise. Mr. Bernanke insists that the absence of compelling investment opportunities in the real economy justifies continued, highly accommodative monetary policy. 

Fox News:

• US Navy to send warship near disputed islands claimed by China. The U.S. Navy plans to send a ship to within 12 nautical miles of disputed islands in the South China Sea, a U.S. official confirmed to Fox News -- in an apparent challenge to Beijing's territorial claims. Reuters first reported that the Navy planned within 24 hours to send a destroyer near the Spratly Islands, an archipelago that China aggressively has laid claim to by building airstrips and other features on top of reefs.

MarketWatch.com:

• What to watch for in Apple’s earnings. Apple Inc. is set to report fourth-quarter earnings after the market’s close on Tuesday. 

• Cheesecake Factory(CAKE) falls after earnings miss. Cheesecake Factory Inc.'s third-quarter earnings rose 8% as the company's namesake chain posted its 23rd consecutive quarter of positive same-store sales. However, total revenue was slightly below Wall Street estimates. The company's shares fell 5.7% to $49.02 in after-hours trading.

Zero Hedge:

• New Drone Footage Captures Scope Of EU's Migrant Crisis As Brussels Plans Refugee "Holding Camps". (pic)

• Is The Yield Curve Still A Dependable Signal? (graph)

• Greek Creditors Refuse To Make Next Loan Payment - German Press. 

• Meet The "Million Dollar Shack": Documentary Lays Bare California's Housing Bubble. (video)

• In Latest Obamacare Fiasco, Most Low-Income Workers Can't Afford "Affordable Care Act".

• Complacency Reigns At Epic Levels: "Few Are Ready For What Is Coming".

• Peak Housing 2.0: Sam Zell Dumps 23,000 Apartments In 2007 Deja Vu. (graph)

• The Inherent Problem Of Eternal Bullishness. (graph)

• Operational & Financial Stress Unavoidable For Energy Names, Goldman Warns Distillate Storage "Too Full For Comfort". (graph)

• What Recovery? Record Number Of Americans Become Blood Plasma "Sellers" To Make Ends Meet. (graph)

• US Stock Market Breadth Is Collapsing Again. (graph)

• Traders Confused By Lack Of Central Planner Direction: Pump Bonds & VIX, Dump Oil & Gas. (graph)

Business Insider:

• Marvell Technology's(MRVL) auditor resigned and now the stock is crashing.

• The first politician has come out and said she's not done with Valeant(VRX).

• China must significantly devalue its currency to remain competitive.

Digitimes:

• Apple(AAPL) Suppliers Expect 4Q IPad Shipments to Decline. 4Q iPad shipments will probably drop y/y, citing officials in the supply chain. Initial orders for iPad Pro weaker-than-expected; shipments likely to be fewer than 2.5m units by end of 2015.

Evening Recommendations 

• None of note

Night Trading

• Asian equity indices are -1.0% to -.25% on average.

• Asia Ex-Japan Investment Grade CDS Index 133.75 +2.0 basis points.

• Asia Pacific Sovereign CDS Index 71.75 +.5 basis point.

• Bloomberg Emerging Markets Currency Index 72.09 -.07%. 

• S&P 500 futures -.22%.

• NASDAQ 100 futures -.26%.

Morning Preview Links

Earnings of Note

Company/Estimate

• (ARG)/1.29

• (AKS)/-.05

• (BABA)/.54

• (BAX)/.29

• (BP)/.07

• (BMY)/.35

• (COH)/.40

• (CMCSA)/.40

• (GLW)/.35

• (CMI)/2.59

• (DD)/.10

• (F)/.46

• (HCA)/1.19

• (IR)/1.16

• (LXK)/.57

• (MDC)/.43

• (MRK)/.92

• (PCAR)/1.16

• (PFE)/.51

• (SCHN)/.31

• (SEE)/.57

• (AMTD)/.40

• (TXT)/.61

• (UPS)/1.37

• (WYN)/1.68

• (AFL)/1.48

• (AKAM)/.58

• (APC)-.74

• (AAPL)/1.87

• (CBG)/.46

• (ETH)/.46

• (ESRX)/1.44

• (GILD)/2.87

• (NBR)/-.13

• (OI)/.56

• (PNRA)/1.31

• (SKYW)/.66

• (TWTR)/.05

Economic Releases

8:30 am EST

• Durable Goods Orders for September are estimated to fall -1.5% versus a -2.0% decline in August.

• Durables Ex Transports for September are estimated unch. versus unch. in August.

• Cap Goods Orders Non-Defense Ex Air for September are estimated to rise +.2% versus a -.2% decline in August.  

9:00 am EST

• The S&P/CS 20 City MoM SA for August is estimated to rise +.1% versus a -.2% decline in July.

9:45 am EST

• Preliminary Markit US Services PMI for October is estimated to rise to 55.5 versus 55.1 in September.

10:00 am EST

• Consumer Confidence for October is estimated at 103.0 versus 103.0 in September.

• The Richmond Fed Manufacturing Index for October is estimated to rise to -3.0 versus -5.0 in September.
  

Upcoming Splits

• None of note

Other Potential Market Movers

• The Australia CPI, UK GDP, weekly US retail sales, (PFE) analyst call, (SCHW) business update, (KR) investor conference and the (KMX) analyst day could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by real estate and technology 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.