Today's Headlines

Bloomberg:

• Ukraine Says Tanks Enter From Russia Amid Plan for Convoy. Ukraine said an armored column including 10 tanks entered from Russia early today as the government in Moscow unveiled plans to send a second convoy with humanitarian aid into its neighbor’s rebel-held territory. Government forces destroyed two tanks, captured crew members and seized other vehicles from the column that was flying separatist banners, Andriy Lysenko, a spokesman for Ukraine’s military, told reporters in Kiev today. Russian Foreign Minister Sergei Lavrov said he had no information about the incident and accused Ukraine of providing “a lot of disinformation about our invasions.”

• Islamic State Militants Seize Air Base in Syria, Group Says. (video) Islamic State militants seized a Syrian air base, dislodging forces loyal to President Bashar al-Assad from their last stronghold in the northeastern Raqqa province. The al-Qaeda breakaway group, which is also fighting government forces in Iraq, stormed the Tabaqa air base after battles that began last week, said the Syrian Observatory for Human Rights, which monitors the daily developments of the civil war. The government moved its aircraft to other bases, it said. 

• Israel Warns of Extended Gaza Conflict as Hamas Leaders Defiant. (video) Israel and the Gaza Strip’s ruling Hamas group showed no sign of backing down as Egyptian mediators tried to coax them back into a temporary cease-fire.

• China May Cut Salaries of SOE Executives by 70%, Caijing Says. China may cut salaries of executives at state-owned enterprises and financial institutions by as much as 70 percent, the most drastic proposal yet in a planned overhaul of SOE management, according to Caijing magazine. The upper limit for the annual salary of bosses at central SOEs and banks would be set at 600,000 yuan ($97,532) under the change, Caijing magazine reports, citing unidentified people with knowledge of a draft plan by the Ministry of Human Resources and Social Security, the Ministry of Finance and other related agencies.

• China Stocks Fall Most in Week on Lending Concern. China’s stocks fell, capping the benchmark index’s biggest loss in a week, as concern that new bank lending isn’t picking up overshadowed a rally for airlines. China Citic Bank Corp. and Huaxia Bank Co. led declines for financial companies, sliding at least 1.2 percent. Baoshan Iron & Steel Co., the largest-listed steelmaker, lost 3.1 percent after reporting a 14 percent drop in first-half profit. China Eastern Airlines Corp., the second-biggest domestic carrier, surged by the daily limit in Shanghai on the prospect it will benefit from an aviation investment fund. The Shanghai Composite Index (SHCOMP) fell 0.5 percent to 2,229.27 at the close, the biggest loss since Aug. 14. 

• European Stocks Climb After Draghi Signals More Stimulus. European stocks rose to their highest level this month, following two weekly increases, after European Central Bank President Mario Draghi signaled policy makers are ready to add stimulus. Banks contributed the most to the Stoxx Europe 600 Index’s gain, with Banca Monte dei Paschi di Siena SpA rallying 5.8 percent, and Banco Santander SA and BNP Paribas SA each adding at least 2 percent. Arkema SA (AKE) advanced 2.6 percent after Deutsche Bank AG recommended investors buy shares of the maker of composites and coatings. Eurazeo SA rose 3.4 percent after Societe Generale SA increased its rating on the stock. The Stoxx 600 gained 1.1 percent, the most since Aug. 18, to 340.46 at the close of trading in London, with all 19 industry groups up.

• German Business Climate Drops for Fourth Month on Risks. German business confidence declined for a fourth month, reflecting a faltering euro-area economy that European Central Bank President Mario Draghi says might need more stimulus. The Ifo institute’s business climate index, based on a survey of 7,000 executives, fell to 106.3 in August from 108 in July. Economists predicted a drop to 107, according to the median of 39 estimates in a Bloomberg News survey.

• Short Sellers Add Bets Against VIX As Volatility Fades. Volatility in U.S. equity markets is near an all-time low and traders have loaded up on bets it has further to fall. Short holdings on an exchange-traded note tracking the Chicago Board Options Exchange Volatility Index reached a six- month high in August, essentially a bet that the volatility gauge will keep falling. There are about 19 million shares of the iPath S&P 500 VIX Short-Term Futures ETN that have been borrowed and sold to speculation on declines, almost three times the level from early June, data compiled by Markit Ltd. shows.

• Swaps Boom Is Unintended Consequence of New Curbs on Wall Street. The $9.8 trillion U.S. corporate-bond market may look pretty sleepy right now, but there’s more and more happening in its shadows. Instead of bothering with trading investment-grade bonds themselves, investors are increasingly turning to derivatives tied to the creditworthiness of specific companies. Volumes in such synthetic wagers have surged to the highest levels since at least the beginning of 2011, in many cases outpacing trading in the underlying bonds, according to Barclays Plc (BARC) data. This reflects investors’ concern that they can’t get in and out quickly enough in the market for cash bonds. Wall Street is pulling back in debt trading, potentially leaving investors vulnerable at a time when the outlook may change quickly given the Federal Reserve is grappling with how to exit from a sixth year of record stimulus. The boom in derivatives also underscores how traders are delving back into more complicated structures that are inherently leveraged, amplifying potential gains or losses.

MarketWatch.com:

• China’s troubling targeting of foreign companies.

ZeroHedge:

• France In "Political Turmoil" After Hollande Unexpectedly Dissolves Government.

• Russia Prepares 2nd Humanitarian Convoy "Invasion".

• Services PMI Drops Most In 6 Months, "Recovery Has Lost Some Momentum", Markit Says. (graph)

• New Home Sales Drop To Lowest Since March As Northeast Craters; Biggest Supply Since October 2011. (graph) 

• Dallas Fed Plunges, Biggest Miss In 16 Months As New Orders Collapse. (graph)

• The New Misery Index. (graph)

• Behold The Magic Of Accounting In First Half Earnings. (graph)

Business Insider: 

• PAUL RYAN: 'We Were Right'. Rep. Paul Ryan (R-Wisconsin) looks back at the 2012 election and says, "We were right." Ryan, the 2012 vice presidential nominee alongside presidential nominee Mitt Romney, says the pair was right about the Obama administration's foreign policy leading to the kinds of crises popping up in the Middle East with the Islamic State of Iraq and Syria. He says Romney was right when he declared Russia the U.S.' greatest geopolitical foe, as evidenced by the current crisis in Ukraine.

• Ukrainian Forces Clash With Rebels Near Russian Border And Accuse Moscow Of Opening New Front.

• This Is The Chart That's Been Keeping Mario Draghi Up At Night.

Financial Times:

• Market watchdog warns on danger of cyber attack.

De Standard:

• German Economy Isn't Good News, Coene Says. "The faltering German motor isn't good news for the other European economies, also not for Belgium," European Central Bank Governing Council member Luc Coene says in an interview. "The tone from most here when it comes to Europe is best described as worrying," Coene says. There is concern internationally over the sustainability of the recovery in Europe, he said. "September will give a good indication of economic activity in the fall adn of whether the recent weakening of the economy is temporary or longer lasting. If it's the latter, there will probably be a downward correction" in growth forecasts, Coene says.

Bear Radar

Style Underperformer:

• Large-Cap Value -.30%

Sector Underperformers:

• 1) Coal -1.87% 2) Gold & Silver -1.31% 3) Gaming -.94%

Stocks Falling on Unusual Volume:

• QIHU, GEF, TRUE, GRUB, CMGE, REX, WUBA, WLDN, TRIB, INTU, LEJU, BIS, WEX, CRM, LGP, GB, CPA, KMP, TARO and RYL

Stocks With Unusual Put Option Activity:

• 1) EPI 2) EWT 3) BBY 4) WDAY 5) XLK
  

Stocks With Most Negative News Mentions:

• 1) AGN 2) STZ 3) XHB 4) STLD 5) AA
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Small-Cap Growth +.89%

Sector Outperformers:

• 1) Biotech +2.29% 2) Banks +1.12% 3) Energy +.99%
  

Stocks Rising on Unusual Volume:

• THI, BKW, ITMN, DGLY, ROYT, ATHM, LTM, ANN, EXAS, BITA, JCP, KERX, LTM and MOBL

Stocks With Unusual Call Option Activity:

• 1) ITMN 2) KERX 3) ANF 4) MDLZ 5) TASR
  

Stocks With Most Positive News Mentions:

• 1) THI 2) AAPL 3) BKC 4) ITMN 5) TWTR
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Monday Watch

Weekend Headlines 
Bloomberg:

• Ukraine Claims Russian Military Buildup Along Border. Ukraine said there is a buildup of Russian military equipment along the eastern border, as President Petro Poroshenko in Kiev announced an armed forces upgrade worth $3 billion. German Chancellor Angela Merkel is seeking to give momentum to a diplomatic resolution to the conflict convulsing Ukraine as Poroshenko prepares to meet Russian President Vladimir Putin this week. The Russian buildup of military equpiment is taking place in the region around the city of Rostov, in at least one case 1.5 kilometers (1 mile) from the Ukraine border, according to military spokesman Andriy Lysenko. Pro-Russia rebels have ruined “almost all” of the infrastructure in the city of Luhansk while shelling of Ukrainian troops from the Russian side continues, Lysenko told reporters today. 

• Ukraine Says Army Spending Raised As Merkel Warns on Gas. Ukraine announced a military spending increase before preliminary peace talks with President Vladimir Putin tomorrow, as German Chancellor Angela Merkel pressed for resolution of a parallel dispute over Russian natural gas supplies to Europe this winter. The armed conflict with pro-Russian rebels showed no signs of abating in war-torn eastern Ukraine. Putin will meet with his Ukrainian counterpart Petro Poroshenko during trade talks in the Belarus capital Minsk. “Unfortunately, there will always be a military threat to Ukraine,” Poroshenko said yesterday in revealing the spending increase of more than 40 billion hryvnia ($3 billion). “War has come from the side nobody expected.”

• Russian Media Stocks Lead Drop as Ukraine Crisis Deepens. Media companies led a rout in Russian stocks in New York after Mail.ru Group Ltd. (MAIL), which operates the country’s biggest social networks, cut its sales forecast amid a slowing economy and tension in Ukraine. Yandex NV, Russia’s largest Internet company, fell for a third day and CTC Media Ltd., which owns the nation’s sixth-biggest TV station, declined the most in two weeks on Aug. 22. Mail.ru plunged 12 percent in London. The Bloomberg Russia-US Equity Index of the country’s most-traded shares in the U.S. slumped 0.8 percent after stocks in Moscow ended a ten-day advance, the longest stretch of gains in almost nine years.

• Israel Threatens Expanded Airstrikes, Gaza Ground Operation. Israeli Prime Minister Benjamin Netanyahu told residents of the Hamas-ruled Gaza Strip that any militant target was fair game, as aircraft struck dozens of sites and his defense minister hinted at a new ground incursion. “I urge Gaza residents to immediately evacuate all facilities used by Hamas to carry out terrorist activities,” Netanyahu said at a cabinet meeting held at military headquarters today in Tel Aviv, according to an e-mailed statement. “Every such site is a target for us.”

• Chinese Jet Barrel-Rolls Over U.S. Plane Bringing Protest. A Chinese fighter jet in international waters buzzed a U.S. Navy surveillance aircraft within 20 feet and did a barrel roll over it in what the White House called a provocation. The Aug. 19 incident took place about 135 miles (217 kilometers) east of Hainan Island, the southernmost tip of China, amid international tensions over China’s increasingly assertive territorial claims. U.S. and Chinese planes have had several close encounters over the sea since March. 

• Asian Stocks Decline as Investors Weigh Yellen Comments. Asian stocks fell as investors weighed comments from central bank leaders for clues to monetary policy ahead of conflict negotiations between Russia and Ukraine. Chugai Pharmaceutical Co. slumped 8.7 percent after a person familiar with the matter said Roche Holding AG will decide against bidding for the almost 40 percent of the Japanese drugmaker that it doesn’t already own. Caltex Australia Ltd. (CTX) climbed 4.6 percent after the Australian oil refiner said it plans to cuts 350 jobs and raised its interim dividend more than analyst forecasts. The MSCI Asia Pacific Index (MXAP) slid 0.1 percent to 148.31 as of 9:36 a.m. in Hong Kong.

• Hedge Fund Crude Bets Tumble Amid Surging Global Supply. Speculators are the least bullish on U.S. crude oil prices in 16 months as refinery maintenance weakens demand at a time when Libya and Iraq are swelling global supplies. Futures dropped a fifth consecutive week after money managers reduced net-long positions in West Texas Intermediate, the U.S. benchmark grade, by 14 percent in the seven days ended Aug. 19, the Commodity Futures Trading Commission said.

Wall Street Journal: 

• Pressure Mounts on Obama to Act on Islamic State. Republicans Press for More Action Against Islamic State. President Barack Obama faces pressure at home and in the Middle East to quickly step up strikes at Islamic State militants, but also reluctance from some within his own party and European allies to do so. The leading options under consideration for strikes in Syria—if Mr. Obama decides to expand the fight—are narrow in scope, designed to prevent the Islamic State from carrying out any plots that threaten Americans and from...

• France Calls for Action to Cut Off ISIS Money Supply. France on Friday called for coordinated international action to cut off the Islamic State's access to financial resources amid fears that the Sunni insurgency has become the world's richest jihadist movement. French Foreign Minister Laurent Fabius said the extremist group, already a formidable military force, has enhanced its power by amassing huge piles of cash, thanks in part to individual donors from the Middle East. "The attacks in New York on Sept. 11, 2001, cost $1 million," Mr. Fabius told French radio RMC. "Today, we estimate the Islamic State has several billions."  

• Burger King(BKC) in Talks to Buy Tim Hortons in Canada Tax Deal. Tie-Up Would Be Structured as Tax Inversion With a Combined Market Value of About $18 Billion. 

• Ukraine Showcases Military Might in Independence Day Celebration. Parade Draws Mixed Reaction as Conflict Continues in East. Soldiers, rockets and armored vehicles paraded through central Kiev on Sunday, some of them on their way to the front lines in the east, as Ukraine celebrated its Independence Day with a crisp display of military might that stood in contrast to a grinding conflict in which the Ukrainian offensive appears to be losing momentum.

Fox News:

• Northern California rocked by magnitude 6.0 earthquake. A magnitude 6.0 earthquake hit Northern California near Napa Valley Sunday, injuring at least 120 — 3 critically — and causing extensive damage, including fires sparked by burst gas lines, in the largest tremor to rock the Bay Area since the magnitude 6.9 Loma Prieta quake in 1989.

CNBC:

• China plans its own OS to take on likes of Microsoft(MSFT), Google(GOOG).

Zero Hedge:

• Janet Yellen Is An Insult To Americans.

• Ebola Epidemic Numbers Vastly Under-Reported Due To "Shadow Zones", WHO Warns.

• 5 Things To Ponder: Interesting Stuff.

• White House Accuses Russia Of Painting Military Vehicles White; Merkel Agrees "Actions Represent Dangerous Escalation".

• Did Demand Concerns Spark The Biggest Drop In US Oil Rig Count Since 2012? (graph)

• ISIS Just Crossed "The Line". (cartoon)

• 3 Things Worth Thinking About.

• China's Baby-Boom Bets Go Bust. (video)

• Scottish Independence 'Yes' Vote Is A "High Risk" Event, Citi Warns.

• Obama's "Do Nothing Stupid" Foreign Policy Fails Again As 'New' Iraqi Government Formation Crumbles.

• Europe's Real Borrowing Costs. (graphs)

• The G-20's Solution To Systemically Unstable, "Too Big To Fail" Banks: More Debt.

• Putin's Chief 'Integration' Advisor Warns "Transition Has Always Come About Through War". (video)

• China’s Reaction: America Is A “Disgusting Thief Spying Over His Neighbor’s Fence”.

• Russia Asks If America Is Still Fit To "Participate In Solving International Problems".

• The Broken Links In The Fed's Chain Of Cause & Effect.

• CME Delays Futures Opens Due To "Glitch"; USD Jumps On EUR, JPY Weakness. (graph)

• Mal-Investment Mania - The Second-Lien Scramble Is Back. (graph)

• How Hedge Funds Are Making Money In 2014: The Full Strategy Breakdown. (graph)

• Krugman's Keynesian Crackpottery: Wasteful Spending Is Better Than Nothing!

ValueWalk:

• Why The Fed Could Raise Rates By March 2015.

Business Insider:

• This Chart From Mario Draghi Reveals The Slow-Motion Catastrophe That Is The Eurozone.

• HSBC Is Getting Sued Over Its Alleged Role In 'Death Bonds'.

• A Megascreen In Beijing Played Graphic Video Of James Foley's Beheading And Ferguson Protests On A Loop.

• China Wants Its Own Operating System By October.

• Pressure Builds Within Fed To Signal New Policy Course.

• Janet Yellen Referenced This 19-Component Labor Market Index At Jackson Hole. (graph)

• Roche To Buy US Biotech Firm InterMune(ITMN) For $8.3 Billion.

Seeking Alpha:

• 8 Reasons Why A New Global Financial Crisis Could Be On The Way. 

Repubblica:

• Sapin Says Euro Area Risks Spiraling Contraction. French Finance Minister Sapin says euro members must slow pace of deficit reduction to help economy, according to interview in la Repubblica.

Nikkei:

• Japan Sales Tax Increase Loses Public Support. Support fell 6 points to 30% from month-earlier, while opposition rose 4 points to 63%, citing poll by Nikkei and TV Tokyo.

Kyodo:

• 57 Children in Fukushima Found to Have Thyroid Cancer. Fukushima prefecture has found 57 people with thyroid cancer who were 18 years old or younger during the Fukushima Dai-Ichi reactor disaster in March 2011.

China Daily:

• China May Start Nationwide Property Tax Next Year. China may introduce a nationwide property tax next year following trials in Chongqing and Shanghai, citing an official from the National People's Congress. Planned property tax swill target land, not just housing as in the trials, the report said.
  

Weekend Recommendations

Barron's:

• Bullish commentary on (PEP), (BG), (APA), (HD) and (HAS).

• Bearish commentary on (SHLD).

Night Trading

• Asian indices are -.50% to +.25% on average.

• Asia Ex-Japan Investment Grade CDS Index 101.0 +1.0 basis point.

• Asia Pacific Sovereign CDS Index 67.75 -.75 basis point.

• FTSE-100 futures n/a.

• S&P 500 futures +.17%.

• NASDAQ 100 futures +.23%.

Morning Preview Links

Earnings of Note
Company/Estimate

• None of note

Economic Releases
8:30 am EST

• The Chicago Fed Nat Activity Index for July is estimated to rise to .2 versus .12 in June.

9:45 am EST

• Preliminary Markit US Services PMI for August is estimated to fall to 58.0 versus 60.8 in July.

10:00 am EST

• New Home Sales for July are estimated to rise to 429K versus 406K in June.
  

10:30 am EST

• Dallas Fed Manufacturing Activity for August is estimated to rise to 12.8 versus 12.7 in July.
  

Upcoming Splits

• (RKT) 2-for-1

Other Potential Market Movers

• The German IFO and the (VMW) Analyst Day could also impact trading today.

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

Weekly Outlook

Week Ahead  by Bloomberg. 
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 mixed as central bank hopes, investor performance angst and yen weakness offset Russia-Ukraine/Mideast tensions, rising European/Emerging Markets debt angst and technical selling. My intermediate-term trading indicators are giving neutral signals and the Portfolio is 50% net long heading into the week.

Market Week in Review

• S&P 500 1,988.40 +1.7%*

 The Weekly Wrap by Briefing.com.

*5-Day Change