Thursday, August 27, 2015

Stocks Higher into Final Hour on Central Bank Hopes, Short-Covering, Oil Bounce, Commodity/Gaming Sector Strength

Broad Equity Market Tone:
  • Advance/Decline Line: Substantially Higher
  • Sector Performance: Most Sectors Rising
  • Volume: Above Average
  • Market Leading Stocks: Performing In Line
Equity Investor Angst:
  • Volatility(VIX) 27.0 -10.95%
  • Euro/Yen Carry Return Index 142.04 +.20%
  • Emerging Markets Currency Volatility(VXY) 11.72 -5.48%
  • S&P 500 Implied Correlation 57.75 +5.92%
  • ISE Sentiment Index 86.0 +.7%
  • Total Put/Call 1.15 +10.58%
  • NYSE Arms .35 -8.83% 
Credit Investor Angst:
  • North American Investment Grade CDS Index 79.28 -3.72%
  • America Energy Sector High-Yield CDS Index 1,924.0 -.06%
  • European Financial Sector CDS Index 79.34 -6.06%
  • Western Europe Sovereign Debt CDS Index 22.95 -3.67%
  • Asia Pacific Sovereign Debt CDS Index 79.09 -.97%
  • Emerging Market CDS Index 342.32 -5.75%
  • iBoxx Offshore RMB China Corporates High Yield Index 117.20 +.04%
  • 2-Year Swap Spread 14.5 +.5 basis point
  • TED Spread 28.0 +1.5 basis points
  • 3-Month EUR/USD Cross-Currency Basis Swap -20.5 -.25 basis point
Economic Gauges:
  • 3-Month T-Bill Yield .05% unch.
  • Yield Curve 149.0 -1.0 basis point
  • China Import Iron Ore Spot $53.93/Metric Tonne +.48%
  • Citi US Economic Surprise Index -2.7 +6.6 points
  • Citi Eurozone Economic Surprise Index 18.1 +.7 point
  • Citi Emerging Markets Economic Surprise Index -7.9 unch.
  • 10-Year TIPS Spread 1.59 +5.0 basis points
  • # of Months to 1st Fed Rate Hike(Morgan Stanley) 5.92 -.63
Overseas Futures:
  • Nikkei 225 Futures: Indicating +351 open in Japan 
  • China A50 Futures: Indicating +38 open in China
  • DAX Futures: Indicating -1 open in Germany
  • Higher: On gains in my tech/medical/biotech/retail sector longs
  • Disclosed Trades: Added to my (IWM)/(QQQ) hedges
  • Market Exposure: Moved to 25% Net Long

Today's Headlines

  • Will the Next Recession Be Made in China? When China sneezes, the world just might catch a cold. China accounted for almost 40 percent of global growth last year. Its appetite for raw materials has undergirded economies from Australia to Brazil to South Africa, and its production capabilities have lowered prices of industrial machines and consumer goods everywhere money changes hands. But it’s also kind of a mess. Fueled by real estate and shadow banking, China’s debt quadrupled from 2007 to 2014, according to a McKinsey analysis. Its economic growth is slowing, pollution is awful, and a hawkish foreign policy is alienating neighbors. 
  • China Intervened Today to Shore Up Stocks Ahead of Military Parade. (video) China’s government resumed its intervention in the stock market on Thursday and has been cutting holdings of U.S. Treasuries this month to support the yuan, according to people familiar with the matter. Authorities want to stabilize equities before a Sept. 3 military parade celebrating the 70th anniversary of the World War II victory over Japan, said two of the people, who asked not to be identified because the move wasn’t publicly announced. Treasury sales allow policy makers to raise dollars needed to bolster the yuan after a shock devaluation two weeks ago, according to different people familiar with the matter.
  • ICBC’s $25.5 Billion of Bad Loans Show Cost of Chinese Slowdown. The world’s biggest bank, Industrial & Commercial Bank of China Ltd., reported a 31 percent increase in bad loans in the first half as a sputtering Chinese economy drove businesses to the wall. Nonperforming loans jumped to 163.5 billion yuan ($25.5 billion), the company said on Thursday. The lender’s zero profit growth in the second quarter from a year earlier, shown in an exchange filing, was partly due to a doubling of provisions for soured credit. Prospects for bad debt to keep rising are dragging on China’s lenders, with the biggest banks trading below book value. A $5 trillion slump in stocks from their June peak is making it harder for the Communist Party to sustain business confidence and prevent a deeper economic slowdown that worsens debt risks. The increase in ICBC’s bad loans in the first half was at more than twice the pace of the same period in 2014.
  • China Detains 23 After Deadly Warehouse Explosions in Tianjin. China’s top prosecutor is holding 10 officials and port executives as well as a senior Transport Ministry official under criminal detention for alleged neglect of duty and abuse of power in the Tianjin warehouse explosions that killed at least 139 people, the official Xinhua News Agency reported.
  • Will Emerging Markets Be Held Back by Currencies? (video)
  • Russia's Deceleration Is Most Damaging to Euro Area. (video)
  • UBS Advises Wealthy Clients to Sell Euro, Sees Drop to $1.05. UBS Group AG, the world’s largest private bank, is advising its wealthy clients to sell the euro, saying a worsening inflation outlook has increased the risk of further quantitative easing in Europe. The single currency is set to weaken to $1.05 in three months, James Purcell, a Hong Kong-based cross asset strategist for UBS’s wealth management business, said in an interview Thursday. The euro has fallen for three straight days, losing 2.8 percent, to trade at $1.1291 as of 10:50 a.m. in London.  
  • European Stocks Erase Weekly Declines, Joining Global Advance. Confidence is returning to the market, and European stocks have erased their weekly losses. The Stoxx Europe 600 Index climbed 3.5 percent on Thursday, extending the rally after data showed the U.S. economy grew more than previously forecast. The gauge is now up 0.3 percent for the week. All industry groups advanced, mirroring increases in commodities, while benchmark measures in the U.K., Germany and France rallied more than 3 percent.
  • World Grain Stockpiles at 3-Decade High After Harvests Spur Glut. Global grain stockpiles are set to swell to the largest in almost three decades, further boosting supply that’s led to a slump in prices. World inventories of wheat, corn and other grains will reach 447 million metric tons by the end of the current marketing year, the highest since the 1986-87 season, according to the International Grains Council in London. The agency on Thursday raised its forecast by 2.8 percent from an estimate in July, when it had predicted inventories would fall from last year, citing better wheat crops in Europe and the former Soviet Union.
  • Oil Jumps Most in Three Years. Oil climbed the most in three years in New York as data showed the U.S. economy grew more than previously estimated. West Texas Intermediate futures rose as much as 9.6 percent, the biggest intraday gain since June 2012. Prices extended gains after Royal Dutch Shell Plc issued a force majeure on Bonny Light exports from Nigeria.   
  • Coal Seen Dropping Below $50 in Rout as Output Fails to Slow. Coal may drop below $50 a metric ton this year as a supply glut combines with a slide in emerging market currencies that supports exports.
  • How Central Bankers Are Twisting Classic Bond-Investing Logic. The more central banks mess around with global bond markets, the more you have to question how you invest in bonds. Think safe-haven debt, such as U.S. Treasuries, will provide a hedge against losses on stocks? Not always. Or that central bankers really have control over borrowing costs? Or that you ought to get paid to lend money to Germany, Switzerland, France and Belgium? Nope, on both counts.
  • First Ruhle: The Fed Blew Its Opportunity. Coulda ... woulda ... shoulda ... but didn't. The Federal Reserve has had many opportunities to raise rates over the last several years and—whether it was because of too many snowstorms, too few jobs, or not enough consumers hitting the malls—the Fed didn't raise. Why? Because it didn't have to. When the unemployment rate dropped to 7 percent in 2013 and 6.5 percent in 2014, many said this was enough cause to finally raise rates off the extraordinary zero bound. The Fed kept moving the goalposts and said: not just yet. Here we are: China is in crisis, Greece is hobbling along, and U.S. markets are operating in a liquidity vortex. Hampered by Dodd-Frank restrictions, Wall Street is unable to absorb risk and curb panicked volatility. The Fed balked, waited, and stalled and now has lost its opportunity to raise rates. Over the past five days, we've quickly learned how sweaty and uncomfortable it is to be backed into a corner in August.
Zero Hedge: 
  • China's Economy Faces Downward Pressure as Demand Weak. China's economy faces "relatively big" downward pressure, citing Xu Shaoshi, chairman of China's National Development and Reform Commission.
South China Morning Post:
  • China’s local government debt up 6pc in 18 months, report says. China's local government debt rose by about 700 billion yuan (HK$845 billion), or 6.4 per cent, in the 18 months from June, 2013, Chinese news portal reported on Wednesday. The figures were contained in a report sent to the national legislature, which is considering a bill from the State Council that would limit how far local governments can move into the red. It would be the first such cap since the Budget Law was passed last year. There is no comprehensive breakdown of local authorities' debt loads in China, but the report sent to the National People's Congress and obtained by Caixin put the figure for the end of last year at 11.6 trillion yuan, up from the National Audit Office's 10.9 trillion estimate in June, 2013. About 6.6 trillion yuan of the 2014 year-end total was incurred through funding projects in transport, public facilities and energy projects. That was an increase of 27 per cent.

Bear Radar

Style Underperformer:
  • Small-Cap Value +1.74%
Sector Underperformers:
  • 1) Airlines +.04% 2) Utilities +.71% 3) HMOs +1.34%
Stocks Falling on Unusual Volume:
Stocks With Unusual Put Option Activity:
  • 1) ITB 2) MET 3) TIF 4) SHLD 5) ORCL
Stocks With Most Negative News Mentions:
  • 1) AAL 2) ATW 3) TNET 4) GLF 5) WRLD

Bull Radar

Style Outperformer:
  • Mid-Cap Value +2.43%
Sector Outperformers:
  • 1) Steel +5.89% 2) Gold & Silver +5.86% 3) Oil Service +5.07%
Stocks Rising on Unusual Volume:
Stocks With Unusual Call Option Activity:
  • 1) BTU 2) ACI 3) TWC 4) BAX 5) P
Stocks With Most Positive News Mentions:
  • 1) AVGO 2) PVH 3) OSK 4) PRU 5) GES

Morning Market Internals

NYSE Composite Index:

Wednesday, August 26, 2015

Thursday Watch

Evening Headlines 
  • China Meltdown So Large That Losses Eclipsed BRICS Peers, Twice. Take the combined size of all stocks traded in Brazil, Russia, India and South Africa, multiply by two, and you’ll get a sense of how much China’s market value has slumped since the meltdown started. Shanghai-listed equities erased $5 trillion since reaching a seven-year high in June, half their value, as margin traders closed out bullish bets and concern deepened that valuations were unjustified by the weak economic outlook. The four other countries in the BRICS universe have a combined market capitalization of $2.8 trillion, according to data compiled by Bloomberg. China has accounted for 41 percent of equity declines worldwide since mid-June, with the scale of the drop also exceeding the entire size of the Japanese stock market. “China has been the single most important source of growth in the world for several years, hence such a sharp slowdown has a profound impact on trade,” Nathan Griffiths, a senior emerging-market equities manager who helps oversee about $1.2 billion at NN Investment Partners in The Hague, said by e-mail. 
  • China Brings Back High-Risk Debt Structures to Increase Leverage. Remember putable bonds? Or debt insurers that collapsed in the U.S. in the wake of the global financial crisis? They’re back -- in China. Oceanwide Holdings Co. earlier this month sold the largest dollar-denominated putable security from Asia since 2003. Investors can demand the Beijing developer buy the notes back in three years, even if it doesn’t want to. HNA Capital Holding Co., a Beijing-based investment bank, sold $200 million of bonds Aug. 11 guaranteed by a Chinese insurer whose exposure to troubled debt doubled last year.
  • Analyst Who Saw China Rout Says Emerging Stocks Not Cheap Enough. Emerging-market equities aren’t the bargain they appear to be, even after valuations fell to an 11-year low relative to their developed peers, according to John-Paul Smith, who has been warning of a China-led selloff for more than a year. “Sometimes cheap isn’t enough,” said Smith, an ex-Deutsche Bank AG strategist who now works at Ecstrat in London and also predicted the Russian debt crisis in 1998. The selloff is “about to get much worse given the recent massive falls in commodity prices” and deteriorating economies across the board, he said.
  • Cadillac Purchases Put on Hold in China Amid Stock Plunge. The rout in China stocks is posing another threat to the world’s biggest car market, jeopardizing growth plans for companies from Volkswagen AG to General Motors Co. Chinese equities have suffered the biggest plunge since 1996, leaving would-be buyers with less cash to spend. Dealers are already reporting lost sales from the stock tumult and automakers are bracing for more pain after a slowdown in the once-hot car market. “Dealers are gritting their teeth,” said Zhu Kongyuan, secretary general of the China Auto Dealers Chamber of Commerce, a Beijing-based trade group. “People won’t buy cars if they think their money bags will shrink. There are no magic tricks here.” Global automakers have plowed billions of dollars into Chinese factories.
  • Beloved European Stock Loses Luster as China Boom Turns to Pain. Europe’s highest-flying stock this year is seeing the knock-on effect from the exodus in emerging markets. After more than doubling earlier this year, wind-turbine maker Gamesa Corp. Tecnologica SA has tumbled 22 percent as the outlook for global growth deteriorated and energy prices plunged further. Investors, who piled into the stock to benefit from the surging demand in China, Brazil and India, are now heading for the exit. “People are nervous about emerging markets,” said Jose Manuel Arroyas, a Madrid-based analyst at Exane BNP Paribas. “This stock is priced for future growth. If there’s no growth, then the stock is expensive.” 
  • China Doing What Greece Didn't as Traders Give Up on Europe ETFs. All through the equity plunge that culminated in a bloodbath on Monday, exchange-traded funds tracking European equities held on to investments. That might be changing now. The WisdomTree Europe Hedged Equity Fund and Vanguard FTSE Europe ETF both had their first withdrawals in months. Investors are capitulating as they start to question their bets that Europe’s stocks would rally with an economic recovery, according to Nicola Marinelli of Pentalpha Capital Ltd.“It’s the sudden realization that assumptions about the global economy were too optimistic,” said Marinelli, a fund manager who helps oversee 114 million euros ($130 million) of assets at Pentalpha in London. 
  • Australia Says South China Sea Tensions May Threaten Interests. Tensions in the South China Sea have the potential to threaten Australia’s interests, Defense Minister Kevin Andrews said as he pledged to bolster the nation’s military alliance with the U.S. “Competing claims for territory and natural resources in the South China Sea will continue to be a source of tension in the region,” Andrews said in the draft of a speech to be delivered in Canberra Thursday. “Combined with growth in military capability, this backdrop has the potential to destabilize the region and threaten Australia’s interests.”
  • Oil Industry Needs to Find Half a Trillion Dollars to Survive. (graph) At a time when the oil price is languishing at its lowest level in six years, producers need to find half a trillion dollars to repay debt. Some might not make it. The number of oil and gas company bonds with yields of 10 percent or more, a sign of distress, tripled in the past year, leaving 168 firms in North America, Europe and Asia holding this debt, data compiled by Bloomberg show. The ratio of net debt to earnings is the highest in two decades. If oil stays at about $40 a barrel, the shakeout could be profound, according to Kimberley Wood, a partner for oil mergers and acquisitions at Norton Rose Fulbright LLP in London.
  • Goldman(GS) Distressed-Debt Traders Ensnared in Market Turmoil. Even Goldman Sachs Group Inc. hasn’t been left unscathed by the carnage in the market for distressed debt this year. Goldman Sachs has lost $50 million to $60 million on its distressed-trading desk in 2015, according to people familiar with the performance. The unit suffered losses on its position in Verso Corp., a paper producer whose bonds lost two-thirds of their value this year, as well as on debt of energy companies, said the people, who asked not to be named discussing the information because it isn’t public. Banks and investors who buy debt that mainstream money managers jettison have had a tough year making profits. Not only are they chasing a limited number of opportunities, they’re losing out on usually successful strategies. Commodities-linked debt has been disastrous.
Wall Street Journal:
  • Insurers Win Big Health-Rate Increases. Some state regulators say new costs justify hefty increases under the Affordable Care Act. At a July town hall in Nashville, Tenn., President Barack Obama played down fears of a spike in health insurance premiums in his signature health law’s third year. “My expectation is that they’ll come in significantly lower than what’s being requested,” he said, saying Tennesseans had to work to ensure the state’s insurance commissioner “does their job in not just passively reviewing the rates, but really asking, ‘OK, what is it...
  • Hedge Funds Bruised by Stocks’ Meltdown. A tumble in share prices stunned many hedge-fund managers and erased the year’s gains for some. Hedge-fund managers like to promise their investors protection from market swings. In the recent stock swoon, many were caught off guard. 
Business Insider:
NY Times:
USA Today:
  • Workday(WDAY) shares fall on weak billings forecast. Workday Inc, a provider of cloud applications for finance and human resources, forecast third-quarter billings below expectations, saying it would receive less money in advance for newer contracts in the quarter, sending its shares down after the bell. The company said billings were also affected, as it took a lion's share of the money upfront for some older contracts, resulting in smaller billings now. Workday's shares traded down 7.2 percent at $67.20 after-the-bell.
  • Ten automakers are sued in U.S. over 'deadly' keyless ignitions. Ten of the world's biggest automakers were sued on Wednesday by U.S. consumers who claim they concealed the risks of carbon monoxide poisoning in more than 5 million vehicles equipped with keyless ignitions, leading to 13 deaths. According to the complaint filed in federal court in Los Angeles, carbon monoxide is emitted when drivers leave their vehicles running after taking their electronic key fobs with them, under the mistaken belief that the engines will shut off.
Sydney Morning Herald:
  • BHP Billiton's(BHP rating at risk as China's slowdown slashes its earnings. The plunge in commodity prices is putting BHP Billiton's credit rating at risk. The cost of insuring the Australian miner's debt against non-payment rose to a three-year high of 108 basis points, a level Deutsche Bank AG says is consistent with a downgrade, after this week's profit report. While it's the highest-rated non-bank borrower in the iTraxx Australia index, the price of BHP's credit-default swaps exceeds those of nine other non-financial companies in the 25-member gauge.
Financial News:
  • China Rate Cut Can't Change Stock Fundamentals. Rate and RRR cuts can boost short-term confidence but can't change the fundamentals of China's stock market, according to commentary written by Ma Meiruo.
Evening Recommendations 
  • None of note
Night Trading
  • Asian equity indices are +1.25% to +2.0% on average.
  • Asia Ex-Japan Investment Grade CDS Index 133.75 -4.75 basis points.
  • Asia Pacific Sovereign CDS Index 79.75 -2.75 basis points.
  • S&P 500 futures +.41%.
  • NASDAQ 100 futures +.55%.

Earnings of Note
  • (DG)/.94
  • (SJM)/1.23
  • (MIK)/.16
  • (MOV)/.42
  • (PDCO)/.54
  • (SIG)/1.15
  • (TIF)/.91
  • (TD)/1.17
  • (ARO)/-.55
  • (ADSK)/.17
  • (GME)/.24
  • (MRVL)/.11
  • (OVTI)/.39
  • (SWHC)/.23
  • (ULTA)/1.12
  • (ZOES)/.04
Economic Releases
8:30 am EST
  • 2Q GDP is estimated to rise +3.2% versus a prior estimate of a +2.3% gain.
  • 2Q Personal Consumption is estimated to rise +3.1% versus a +2.9% prior estimate.
  • 2Q GDP Price Index is estimated to rise +2.0% versus a prior estimate of a +2.0% gain.
  • 2Q Core PCE is estimated to rise +1.8% versus a prior estimate of a +1.8% gain.
  • Initial Jobless Claims are estimated to fall to 274K versus 277K the prior week.
  • Continuing Claims are estimated to fall to 2248K versus 2254K prior.
10:00 am EST
  • Pending Home Sales for July are estimated to rise +1.0% versus a -1.8% decline in June.
11:00 am EST
  • Kansas City Fed Manufacturing Activity for August is estimated to rise to -4 versus -7 in July.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Jackson Hole Fed Conference Day 1, China Industrial Profits report, Japan Unemployment data, $29B 7Y T-Note auction, Bloomberg weekly Consumer Comfort Index and the weekly EIA natural gas inventory report could also impact trading today.
BOTTOM LINE: Asian indices are higher, boosted by industrial and technology 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 day.