Thursday, August 23, 2012

Stocks Falling into Final Hour on Surging Eurozone Debt Angst, Rising Global Growth Fears, Tech Sector Weakness, US "Fiscal Cliff" Concerns


Broad Market Tone:

  • Advance/Decline Line: Lower
  • Sector Performance: Almost Every Sector Declining
  • Volume: Below Average
  • Market Leading Stocks: Performing In Line
Equity Investor Angst:
  • VIX 16.32 +7.94%
  • ISE Sentiment Index 90.0 -19.64%
  • Total Put/Call .91 -6.19%
  • NYSE Arms 1.57 +113.28%
Credit Investor Angst:
  • North American Investment Grade CDS Index 101.77 bps +2.36%
  • European Financial Sector CDS Index 244.63 bps +3.62%
  • Western Europe Sovereign Debt CDS Index 228.86 -.59%
  • Emerging Market CDS Index 248.11 +1.40%
  • 2-Year Swap Spread 17.75 -2.0 basis points
  • TED Spread 33.0 unch.
  • 3-Month EUR/USD Cross-Currency Basis Swap -33.5 -.25 basis point
Economic Gauges:
  • 3-Month T-Bill Yield .10% unch.
  • Yield Curve 140.0 -4 basis points
  • China Import Iron Ore Spot $99.60/Metric Tonne -4.87%
  • Citi US Economic Surprise Index -13.70 +.9 point
  • 10-Year TIPS Spread 2.30 +3 basis points
Overseas Futures:
  • Nikkei Futures: Indicating -103 open in Japan
  • DAX Futures: Indicating -9 open in Germany
Portfolio:
  • Slightly Lower: On losses in my Retail, Medical and Tech sector longs
  • Disclosed Trades: Added to my (IWM)/(QQQ) hedges and to my (EEM) short
  • Market Exposure: Moved to 25% Net Long
BOTTOM LINE: Today's overall market action is bearish as the S&P 500 trades near session lows on surging eurozone debt angst, high food/energy prices, US "fiscal cliff" worries and rising global growth fears. On the positive side, Food, Tobacco and Biotech shares are slightly higher on the day. Copper is gaining +.7%, Oil is falling -1.3%, Lumber is gaining +.9% and the UBS-Bloomberg Ag Spot Index is falling -1.4%. Major Asian indices were mostly higher overnight, boosted by a +1.2% gain in Hong Kong. On the negative side, Defense, Coal, Oil Tanker, Steel, Computer, Disk Drive, Education and Airline shares are especially weak, falling more than -1.25%. Tech shares have traded heavy throughout the day again. Gold is rising +.9%. Major European Indices were lower today, weighed down by a -1.5% decline in Italy. The Bloomberg European Bank/Financial Services Index is falling -.8% today. Brazilian shares are -1.4% on the day. The Germany sovereign cds is rising +4.2% to 60.83 bps, the France sovereign cds is jumping +7.2% to 138.67 bps, the Spain sovereign cds is up +5.2% to 484.67 bps and the Italy sovereign cds is up +4.1% to 435.32 bps. Moreover, the European Investment Grade CDS Index is rising +2.4% to 145.1 bps, the Spain 10Y Yld is gaining +1.2% to 6.35% and the Italian/German 10Y Yld is rising +2.9% to 432.18 bps. The UBS/Bloomberg Ag Spot Index is up +25.4% since 6/1. The benchmark China Iron/Ore Spot Index is down -45.0% since 9/7/11. Moreover, the China Hot Rolled Steel Sheet Spot Index is also picking up downside steam. As well, despite their recent bounces off the lows, the euro, copper and lumber all continue to trade poorly given equity investor perceptions that the Eurozone has successfully kicked-the-can and global central bank stimuli will boost economic growth in the near future. US weekly retail sales have decelerated to a sluggish rate at +1.9%. US Trucking Traffic continues to soften. Moreover, the weekly MBA Home Purchase Applications Index has declined in 5 out of the last 6 weeks and has been around the same level since May 2010 despite investor perceptions of a big improvement in the nationwide housing market. The Baltic Dry Index has plunged around -65.0% from its Oct. 14th high and is now down around -60.0% ytd. Shanghai Copper Inventories have risen +181.0% ytd. Oil tanker rates have plunged recently, with the benchmark Middle East-to-US voyage down to 22.50 industry-standard worldscale points, which is the lowest since May, 2009. The 10Y T-Note continues to trade too well. There still appears to be a fairly high level of complacency among US investors regarding the deteriorating macro backdrop. It still remains unclear to me whether or not Germany will destroy its own balance sheet or allow the ECB to monetize debt in an attempt to "save" the euro even as investors have been pricing this outcome into stocks. Focus Magazine reported recently that a poll by TNS Emnid found that 52% of Germans don’t want European countries to share debt even if the EU takes control over budgets of individual countries, while 31% were in favor of this. The Citi Eurozone Economic Surprise Index is at -52.50 points. Massive tax hikes and spending cuts are still yet to hit in several key eurozone countries that are already in recession. A lack of competitiveness remains unaddressed. The European debt crisis is also really beginning to bite emerging market economies now, which will further pressure exports from the region and further raise the odds of more sovereign/bank downgrades. I continue to believe that China's problems are much larger than commonly perceived and cannot be solved with another massive stimulus package given their real estate bubble, soaring food prices and massive overcapacity in certain key parts of the economy. Uncertainty surrounding the effects on business of Obamacare, the "US fiscal cliff" and the election outcome uncertainty will likely become more and more of a focus for US investors as the year progresses. Little if anything being discussed by global central bankers will actually boost global economic growth in any meaningful way over the intermediate-term, in my opinion. The odds of QE3 have risen recently on comments in the FOMC minutes. This appears to be prompting institutional investors to buy gold, sell the US dollar, sell stocks and buy bonds. I continue to believe QE3 would be a major mistake given the recent surge in stock prices, rising inflation expectations, rising gas prices, worrisome food crisis headlines and less pessimistic US economic data. The quality of the stock rally off the June lows remains poor as breadth, volume, leadership, lack of big volume/gainers and copper/transports divergences all continue to be concerns. Thus, recent market p/e multiple expansion on global central bank stimulus/action hopes, is creating an unstable situation for equities, which could become a big problem this fall unless a significant macro catalyst materializes soon. The explosion higher in the Israel sovereign cds(+30 bps in about 2 weeks to 164.0 bps) is another big red flag. The Mid-east appears to be unraveling again at an alarming rate. For this year's equity advance to regain traction, I would expect to see further European credit gauge improvement, a subsiding of hard-landing fears in key emerging markets, a rising 10-year yield, better volume, stable-to-lower food/energy prices, a US "fiscal cliff" solution, a calming in Mid-east tensions and higher-quality stock market leadership. I expect US stocks to trade modestly lower into the close from current levels on rising eurozone debt angst, profit-taking, more shorting, high food/energy prices, US "fiscal cliff" concerns, growing Mid-east unrest, technical selling, a shift into bonds from stocks and rising global growth fears.

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