Thursday, August 09, 2012

Stocks Slightly Lower into Final Hour on Euro Weakness, Rising Global Growth Fears, Rising Food Prices, US Fiscal Cliff Concerns


Broad Market Tone:

  • Advance/Decline Line: Slightly Higher
  • Sector Performance: Most Sectors Rising
  • Volume: Below Average
  • Market Leading Stocks: Performing In Line
Equity Investor Angst:
  • VIX 15.34 +.13%
  • ISE Sentiment Index 154.0 +31.52%
  • Total Put/Call .86 +7.50%
  • NYSE Arms .66 -3.79%
Credit Investor Angst:
  • North American Investment Grade CDS Index 102.99 bps +.17%
  • European Financial Sector CDS Index 242.98 bps -1.26%
  • Western Europe Sovereign Debt CDS Index 241.96 -1.86%
  • Emerging Market CDS Index 247.39 +.87%
  • 2-Year Swap Spread 20.75 +1.25 basis point
  • TED Spread 32.50 -.5 basis point
  • 3-Month EUR/USD Cross-Currency Basis Swap -34.50 +2.5 basis point
Economic Gauges:
  • 3-Month T-Bill Yield .11% unch.
  • Yield Curve 142.0 +5 basis points
  • China Import Iron Ore Spot $114.80/Metric Tonne -.09%
  • Citi US Economic Surprise Index -21.30 +12.2 points
  • 10-Year TIPS Spread 2.29 +10 basis points
Overseas Futures:
  • Nikkei Futures: Indicating -17 open in Japan
  • DAX Futures: Indicating -11 open in Germany
Portfolio:
  • Slightly Higher: On gains in my Retail 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 hugs the flatline despite eurozone debt angst, high food/energy prices, US "fiscal cliff" worries, earnings concerns and rising global growth fears. On the positive side, Coal, Networking, I-Banking and Homebuilding shares are especially strong, rising more than +1.0%. Tech shares have traded well throughout the day. The 10Y Yld is gaining +4 bps to 1.69%. Major Asian indices were mostly higher overnight, led by a +2.0% gain in South Korea. The Bloomberg European Bank/Financial Services Index is gaining +.6%. The Germany sovereign cds is falling -2.4% to 64.78 bps, the France sovereign cds is falling -2.1% to 143.96 bps, the Spain sovereign cds is down -3.1% to 501.49 bps and the Italy sovereign cds is down -3.8% to 440.15 bps. On the negative side, Computer Service, Medical, Drug, REIT, Restaurant, Gaming, Airline and Road & Rail shares are lower on the day. The Transports continue to trade poorly as they sit out the recent broad market rally. The UBS-Bloomberg Ag Spot Index is gaining +.61% and Gold is up +.3%. Major European indices are mostly lower today, led down by a -.6% decline in Spain. The Russia sovereign cds is jumping +3.3% to 167.70 bps and the Brazil sovereign cds is gaining +1.6% to 126.50 bps. Moreover, the Emerging Markets Sovereign CDS Index is gaining +2.1% to 236.96 bps. The record -27.9% plunge in India Capital Goods Output is another big red flag for a key emerging markets economy. The UBS/Bloomberg Ag Spot Index is up +25.6% in about 9 weeks. The benchmark China Iron/Ore Spot Index is down -36.6% 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 global central bank stimuli will boost economic growth in the near future. US weekly retail sales have decelerated to a sluggish rate at +2.0%. US Trucking Traffic continues to soften. Lumber is -12.0% 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 4 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 -60.0% from its Oct. 14th high and is now down around -50.0% ytd. Shanghai Copper Inventories have risen +74.0% 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 CRB Commodities Index is now down -17.3% 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. The AAII % Bulls jumped to 36.5 this week, while the % Bears fell to 27.3. 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 to save the euro even as investors have been pricing this outcome into stocks. The Citi Eurozone Economic Surprise Index is at -67.90 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 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. 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 modestly lower into the close from current levels on eurozone debt angst, profit-taking, more shorting, technical selling, high food/energy prices, earnings worries, US "fiscal cliff" concerns and rising global growth fears.

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