Wednesday, August 15, 2012

Stocks Slightly Higher into Final Hour on Less Eurozone Debt Angst, Short-Covering, Investor Performance Angst, Tech Sector Strength

Broad Market Tone:
  • Advance/Decline Line: Higher
  • Sector Performance: Most Sectors Rising
  • Volume: Below Average
  • Market Leading Stocks: Performing In Line
Equity Investor Angst:
  • VIX 14.42 -2.83%
  • ISE Sentiment Index 103.0 +19.77%
  • Total Put/Call .71 -13.41%
  • NYSE Arms .80 -31.42%
Credit Investor Angst:
  • North American Investment Grade CDS Index 103.0 bps +.09%
  • European Financial Sector CDS Index 240.19 bps +.36%
  • Western Europe Sovereign Debt CDS Index 242.70 +.44%
  • Emerging Market CDS Index 247.67 -.93%
  • 2-Year Swap Spread 20.5 +.5 basis point
  • TED Spread 35.25 +1.75 basis points
  • 3-Month EUR/USD Cross-Currency Basis Swap -35.0 unch.
Economic Gauges:
  • 3-Month T-Bill Yield .08% -2 basis points
  • Yield Curve 152.0 +7 basis points
  • China Import Iron Ore Spot $113.10/Metric Tonne -.18%
  • Citi US Economic Surprise Index -19.10 -7.0 points
  • 10-Year TIPS Spread 2.27 unch.
Overseas Futures:
  • Nikkei Futures: Indicating +15 open in Japan
  • DAX Futures: Indicating +9 open in Germany
Portfolio:
  • Slightly Higher: On gains in my Medical, Biotech and Tech sector longs
  • Disclosed Trades: None
  • Market Exposure: 50% Net Long
BOTTOM LINE: Today's overall market action is mildly bullish as the S&P 500 trades near session highs despite eurozone debt angst, rising food/energy prices, US "fiscal cliff" worries, earnings concerns and rising global growth fears. On the positive side, Networking, Telecom, Road&Rail and HMO shares are especially strong, rising more than +1.0%. Transport shares have traded well throughout the day. Lumber is gaining +2.0%. The 10Y Yld is rising +6 bps to 1.8%. The Germany sovereign cds is falling -4.3% to 59.25 bps, the France sovereign cds is down -4.3% to 136.60 bps, the Italian sovereign cds is down -3.5% to 425.52 bps and the UK sovereign cds is falling -3.8% to 54.25 bps. Moreover, the Italian/German 10Y Yld Spread is falling -3.6% to 420.69 bps. On the negative side, Coal, Energy, Oil Service, Ag, Steel, Homebuilding and Airline shares are lower on the day. Commodity-related shares have underperformed throughout the day. Copper is falling -.3%, Oil is gaining +.8%, Gold is gaining +.3% and the UBS-Bloomberg Ag Spot Index is rising +1.1%. Major Asian indices were mostly lower overnight, led down by a -1.2% decline in Hong Kong. The Shanghai Comp fell another -1.1% and is approaching a multi-year low. Major European indices are mostly lower, led down by a -.5% decline in the UK. The Bloomberg European Bank/Financial Services Index is rising +.1%. Brazil is flat on the day. The Portugal sovereign cds is rising +.5% to 749.04 bps, the Hungary sovereign cds is rising +.9% to 155.26 bps, the Saudi sovereign cds is jumping +4.3% to 110.0 bps and the Israel sovereign cds is rising another +.9% to 155.26 bps(+10.3% in 5 days). Moreover, the Emerging Markets Sovereign CDS Index is gaining +.4% to 243.55 bps(+5.0% in 5 days). The UBS/Bloomberg Ag Spot Index is up +23.4% since 6/1. The benchmark China Iron/Ore Spot Index is down -37.5% 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. Lumber is -6.3% since its Sept. 9th high despite improving sentiment towards homebuilders and the broad equity rally ytd. Moreover, the weekly MBA Home Purchase Applications Index has declined for 5 straight 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 -55.0% ytd. Shanghai Copper Inventories have risen +114.5% 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 CRB Commodities Index is now down -18.3% since May 2nd of last year despite the recent surge in food/energy prices. The 10Y T-Note continues to trade too well, despite recent weakness. There still appears to be a fairly high level of complacency among US investors regarding the deteriorating macro backdrop. It remains unclear to me whether or not Germany will destroy its own balance sheet in an attempt to "save" the euro even as investors have been pricing this outcome into stocks. Focus Magazine reported over the weekend a recent 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 -69.50 points, which is near the lowest since mid-Sept. of last year. 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 Italian yield curve is flattening too much again, with the spread down -58.0 bps in 8 days to 2.43%. 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. 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 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 imminent QE3, which were already lower than perceived in my opinion, are likely plummeting with the recent surge in stock prices, inflation expectations, worrisome food crisis headlines and less pessimistic US economic data. As well, as I have been saying for several weeks, a new massive China stimulus round isn’t as likely as perceived as worries over their real estate bubble and soaring food prices intensify. The quality of the recent stock rally 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 hopes, is creating an unstable situation for equities, which could become a big problem this fall unless a significant macro catalyst materializes soon. For this year's equity advance to regain traction, I would expect to see a resumption in 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 and higher-quality stock market leadership. I expect US stocks to trade mixed-to-lower into the close from current levels on eurozone debt angst, profit-taking, more shorting, rising food/energy prices, earnings worries, US "fiscal cliff" concerns and rising global growth fears.

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