Thursday, December 13, 2012

Stocks Lower into Final Hour on Rising Fiscal Cliff Fears, Eurozone Debt Angst, Technical Selling, Tech/Energy Sector Weakness

Broad Market Tone:
  • Advance/Decline Line: Lower
  • Sector Performance: Most Sectors Declining
  • Volume: Slightly Below Average
  • Market Leading Stocks: Performing In Line
Equity Investor Angst:
  • VIX 16.57 +3.89%
  • ISE Sentiment Index 107.0 -25.2%
  • Total Put/Call .86 -1.15%
  • NYSE Arms .93 +35.66%
Credit Investor Angst:
  • North American Investment Grade CDS Index 94.81 +1.61%
  • European Financial Sector CDS Index 151.27 -.34%
  • Western Europe Sovereign Debt CDS Index 111.88 bps +.68%
  • Emerging Market CDS Index 212.02 bps +.73%
  • 2-Year Swap Spread 11.5 +.5 bp
  • TED Spread 25.75 +1.0 bp
  • 3-Month EUR/USD Cross-Currency Basis Swap -21.50 +.5 bp
Economic Gauges:
  • 3-Month T-Bill Yield .05% -2 bps
  • Yield Curve 148.0 +2 bps
  • China Import Iron Ore Spot $126.40/Metric Tonne +1.1%
  • Citi US Economic Surprise Index 51.1 +2.6 points
  • 10-Year TIPS Spread 2.47 -3 bps
Overseas Futures:
  • Nikkei Futures: Indicating -5 open in Japan
  • DAX Futures: Indicating -15 open in Germany
Portfolio:
  • Slightly Higher: On gains in retail sector longs, index hedges and emerging markets shorts
  • Disclosed Trades: None
  • Market Exposure: 25% Net Long
BOTTOM LINE: Today's overall market action is bearish as the S&P 500 trades near sessions lows, testing its 50-day moving average, on rising global growth fears, eurozone debt angst and increasing US "fiscal cliff" fears. On the positive side, Retail, Gaming and Airline shares are higher on the day. Oil is down -.8%, gold is falling -1.0% and the UBS-Bloomberg Ag Spot Index is down -.3%. Major Asian indices were mostly higher, boosted by a +1.7% gain in Japanese shares. On the negative side, Homebuilding, Biotech, Semi, Computer, Oil Service and Alt Energy shares are under meaningful pressure, falling -1.5%. Energy and tech shares have been heavy most of the day. Lumber is down -.8% and Copper is falling -1.5%. The Spain sovereign cds is rising +.8% to 295.34 bps, the Spain 10Y Yld is rising +.75% to 5.4%, the Ireland sovereign cds is gaining +1.3% to 219.68 bps, the UK sovereign cds is up +1.7% to 34.37 bps and the Israel sovereign cds is up +2.1% to 143.65 bps. The The benchmark China Iron/Ore Spot Index is down -31.0% since 9/7/11. As well, copper and oil continue to trade poorly given investor perceptions that the Eurozone has successfully kicked-the-can which will further boost the euro, US housing has hit a major bottom, China's economy is rebounding, Mideast tensions are rising, a US fiscal cliff deal is imminent and Hurricane Sandy will spur rebuilding. Shanghai Copper Inventories have risen +368.0% ytd. US weekly retail sales are rising at a +2.2% sluggish rate. Moreover, the weekly MBA Home Purchase Applications Index 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. US rail traffic is weakening too much. Oil tanker rates have plunged, with the benchmark Middle East-to-US voyage down to 27.50 industry-standard worldscale points. 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 and any fiscal cliff "solution". The recession in Europe is worsening even before more tax hikes and spending cuts hit next year. A lack of economic competitiveness and growth incentives remain unaddressed problems in the region. The European debt crisis continues to drag on emerging market economies, despite investor perceptions that China's economy is accelerating on more infrastructure project state spending, which will further pressure exports from the region and further raise the odds of more sovereign/bank downgrades over the coming months. 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, rising food prices/labor costs, massive overcapacity in certain key parts of the economy and growing bad loans problem. As well, little being done by global central bankers that will help boost global economic growth to an extent that overcomes the growing macro headwinds over the intermediate-term, in my opinion. Over the intermediate-term the Fed's recklessness greatly increases the chances of hard-landings in key emerging markets and of a serious global stock swoon, in my opinion. The most likely outcome for the US fiscal cliff crisis is our own can-kicking or "small bargain" after a complete breakdown in talks occurs sometime before year-end, which would boost stocks in the short-run and leave much investor uncertainty over the intermediate-term. Moreover, any of the likely fiscal cliff "solutions" being bandied about would hurt economic growth, which would more than offset the benefits to investors from less uncertainty going forward. Moreover, uncertainty surrounding the effects on businesses of Obamacare and more regulations will likely become pronounced economic headwinds next year. The Mid-east continues to unravel at an alarming rate, as well. Overall, broad market health remains poor as breadth, volume, leadership, lack of big volume/gainers and copper/oil relative weakness all continue to be concerns. For this year's equity advance to regain traction, I would expect to see further European credit gauge improvement, a further 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/can-kicking, a calming in Mid-east and China/Japan tensions and higher-quality stock market leadership. I expect US stocks to trade modestly lower into the close from current levels on eurozone debt angst, rising global growth fears, increasing US fiscal cliff fears, more shorting, technical selling, profit-taking and tech/energy secotor weakness.

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