Stocks Slightly Higher into Final Hour on Mostly Dovish Fed Commentary, Yen Weakness, Short-Covering, Homebuilding/Gaming Sector Strength

Broad Equity Market Tone:

• Advance/Decline Line: Modestly Higher
  

• Sector Performance: Most Sectors Rising
  

• Volume: Below Average

• Market Leading Stocks: Performing In Line

Equity Investor Angst:

• Volatility(VIX) 12.07 -5.18%

• Euro/Yen Carry Return Index 145.54 +.40%

• Emerging Markets Currency Volatility(VXY) 7.21 -2.57%

• S&P 500 Implied Correlation 43.49 -6.52%

• ISE Sentiment Index 135.0 +64.63%

• Total Put/Call .98 +11.36%

• NYSE Arms .96 +50.15% 

Credit Investor Angst:

• North American Investment Grade CDS Index 58.29 -3.10%

• European Financial Sector CDS Index 58.60 -3.31%

• Western Europe Sovereign Debt CDS Index 28.20 -.60%
• Asia Pacific Sovereign Debt CDS Index 64.41 -1.52%

• Emerging Market CDS Index 247.67 +1.72%

• China Blended Corporate Spread Index 309.17 +.15%
• 2-Year Swap Spread 24.0 unch.

• TED Spread 22.50 unch.

• 3-Month EUR/USD Cross-Currency Basis Swap -13.0 -.25 basis point

Economic Gauges:

• 3-Month T-Bill Yield .02% +1.0 basis point

• Yield Curve 206.0 +1.0 basis point

• China Import Iron Ore Spot $84.20/Metric Tonne -.36%

• Citi US Economic Surprise Index 20.80 -11.0 points

• Citi Emerging Markets Economic Surprise Index -21.90 +.1 basis point

• 10-Year TIPS Spread 2.06 -6.0 basis points

Overseas Futures:

• Nikkei Futures: Indicating +97 open in Japan

• DAX Futures: Indicating +32 open in Germany

Portfolio: 

• Higher: On gains in my tech/biotech sector longs and emerging markets shorts

• Disclosed Trades: Added to my (IWM)/(QQQ) hedges and to my (EEM) short

• Market Exposure: Moved to 50% Net Long

Today's Headlines

Bloomberg:

• Scots Campaigning Final Hours Marked by Emotional Appeals. (video) On the final day of campaigning over Scotland’s future, both sides made emotional appeals to wavering voters to come to their side. Several hundred supporters of independence massed on the steps of the Royal Concert Hall on Buchanan Street in Glasgow today waving flags and banners. “Yes we can! And we will!” they chanted. “Hope, not fear!”

• Russia Sees Positive Step in Law for Eastern Ukraine. Russia called the new law providing a special status for war-torn eastern Ukraine “a step in the right direction” while the government in Kiev cautioned that a drop in Russian natural gas supplies could hobble the European Union during the peak heating season. A shaky cease-fire held in Ukraine’s Donetsk and Luhansk regions, with multiple violations reported since the truce took effect on Sept. 5. The Ukrainian parliament yesterday approved a measure for limited self-rule in the region. 

• China’s Slowdown Seen Yet to Bottom Even After PBOC Acts. China’s growth trajectory is still pointing down, even after an $81 billion liquidity injection. The People’s Bank of China move to provide 500 billion yuan of three-month funds to the nation’s five largest banks will help overcome any pre-holiday cash crunch, though is unlikely to move the needle on gross domestic product, according to economists at banks including Barclays Plc.

• Three Reasons to be Terrified of Alibaba.

• Richemont Sales Miss Estimates on Asian Slowdown. Cie. Financiere Richemont SA (CFR), the world’s largest jewelry maker, posted the slowest start to a year since the global recession as consumers held back on buying luxury goods in Hong Kong, halting Asian growth. 

• European Stocks Rebound From Two-Week Low Before Fed. European stocks rose for the first time in nine days as optimism that central bankers around the world will continue to support economic recovery helped the Stoxx Europe 600 Index rebound from a two-week low. Air France-KLM Group gained 3.6 percent after France’s prime minister asked its pilots to end a strike. DS Smith Plc advanced 5.1 percent after saying sales are increasing at a faster pace than last year. Daily Mail and General Trust Plc dropped to an 11-month low after saying a delayed release of its risk-management-solutions product will result in an impairment and higher costs. Cie. Financiere Richemont SA fell 4.1 percent after five-month sales growth missed estimates. The Stoxx Europe 600 Index climbed 0.5 percent to 344.39 at the close of trading.

• Fed Keeps ‘Considerable Time’ Pledge as Growth Is ‘Moderate'. The Federal Reserve said the economy is expanding at a moderate pace and inflation is below its goal while maintaining a commitment to keep interest rates near zero for a “considerable time” after asset purchases are completed. “Labor market conditions improved somewhat further” while “significant underutilization of labor resources” remains, the Federal Open Market Committee said today in a statement in Washington. “Inflation has been running below the committee’s longer-run objective.” In July, the Fed said inflation was “somewhat closer” to its goal.

• Fracking Bans Enrage Coloradans Sitting on Energy Riches. Mineral owners left out of the energy boom in Colorado and other states are mobilizing to fight local fracking bans they say are depriving them of billions of dollars in oil and natural-gas royalties.

Wall Street Journal:

• PBOC Struggles as Chinese Borrowers Hold Back. Lack of Loan Demand Hampers Efforts to Increase Growth. China's central bank so far has failed to lift the world's second-largest economy out of its doldrums, and that is in part because of businesspeople like Li Jun. Mr. Li runs a fish-farming business in eastern China's Jiangsu province. The People's Bank of China is pushing the country's big, state-owned banks to lend more money to businesses like his. Instead of taking the cash, Mr. Li is cutting back. "Banks are...

MarketWatch.com:

• The biggest risk in Alibaba IPO may be China.

CNBC:

• Apple(AAPL) to announce new iPads in October: Report.

• Here's what changed in new Fed statement.

ZeroHedge:

• Obamanomics' Fatal Flaw: Minimum Wage-Hiking States Are Seeing Slower Job Growth. (graph)

• Abenomics Crushes Sony: Electronics Giant Forced To Cancel Dividend For First Time Ever.

• ISIS Releases New Video, Warns "Fighting Has Just Begun". (video)

• Wall Street Responds To China's QE: Beijing Finds Lack Of Faith Disturbing. (graph)

• Homebuilder Sentiment Soars To 9 Year High (Mortgage Apps 14-Year Low). (graph)

• This Russian Trend Is Not Europe's Friend. (graph)

• Bond Yields Slide As Core CPI Weakest In Over 4 Years. (graph)

• How FedEx(FDX) Just Beat EPS By A Whopping 14 Cents. (graph)

Quartz:

• Is the Kremlin trying to grab another oligarch’s oil company? The Kremlin is being accused of a big new asset grab in a murky case against Russia’s largest mobile telephone operator. Russian prosecutors yesterday ordered the house arrest of Vladimir Yevtushenkov, who controls MTS, Russia’s largest mobile phone operator, and Bashneft, an oil company in the region of Bashkortostan.

CNN:

• Mark Mobius: Stay away from Alibaba. (video)

Bear Radar

Style Underperformer:

• Small-Cap Growth +.21%

Sector Underperformers:

• 1) Oil Service -1.10% 2) Disk Drives -.97% 3) Software -.63%

Stocks Falling on Unusual Volume:

• SXL, RTRX, SKX, RAX, SNE, OI, ADBE, DORM, GIS, BBSI, MBT, UVV, FMC, ATVI, TIBX, SHLD, DNKN, PEIX, UN, BAX, CBRL, BBL, CCK, CRR and CPA

Stocks With Unusual Put Option Activity:

• 1) EWT 2) RAX 3) ADBE 4) DO 5) LEN
  

Stocks With Most Negative News Mentions:

• 1) RDC 2) NBL 3) AFL 4) FDS 5) K
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Small-Cap Growth +.49%

Sector Outperformers:

• 1) Homebuilders +3.03% 2) Alt Energy +1.47% 3) Road & Rail +1.25%
  

Stocks Rising on Unusual Volume:

• AUXL, EPIQ, YRCW, AGIO, ENDP, DD, DRC, X, LEN, RJET, AVNR, VNDA, KBH and FEYE

Stocks With Unusual Call Option Activity:

• 1) BWP 2) TAP 3) FIG 4) ADBE 5) WLP

Stocks With Most Positive News Mentions:

• 1) FDX 2) X 3) NUE 4) DRC 5) SSYS
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Wednesday Watch

Evening Headlines 
Bloomberg:

• Scots Independence Campaigns Make Last Appeal for Victory. The battle over Scotland’s future in the U.K. entered the final day of campaigning with the pro-independence side saying it had the momentum to win the ballot and the “no” camp urging voters not to use it as a protest. Three polls last night showed the anti-independence Better Together group backed by Prime Minister David Cameron and the main U.K. parties leading the “yes” campaign by 52 percent to 48 percent, excluding undecided voters. All the latest surveys showed the gap was closing fast. 

• Ukraine Truce Wobbles as Eastern Regions’ Power Expanded. The cease-fire in Ukraine showed more signs of strain as rebels questioned further peace talks with the government, even after lawmakers in Kiev approved special status for the country’s two easternmost regions. Some separatist groups called for a renewed offensive and a rebel leader accused the government of violating the terms of a truce accord signed Sept. 5. Clashes continued yesterday near Donetsk, the largest city in the conflict zone, where the airport has been the site of some of the heaviest fighting.

• Russia Takes Double Punch as Vanishing Workers Fan Prices. The aging workforce is packing a double punch for the Russian economy. The unborn generation of the 1990s, a period of hyperinflation and instability after the Soviet breakup, left the nation depleted of younger workers. Unemployment is at a record low, putting pressure on wages (RUMEREAL) and helping keep inflation near the fastest since 2011. The poor demographics are shaving 0.5 percentage point off economic growth a year, according to the Higher School of Economics in Moscow, which estimates the working-age population will shrink by as many as 15 million people, or more than the size of the Russian capital, by 2030.

• Data Flaws in China Cities With Worst Air Risk Xi Pledge. China’s efforts to name and shame its filthiest power stations and impose tough new emission standards are the leading weapons in President Xi Jinping’s war on pollution. The world shouldn’t hold its breath waiting for him to declare victory.

• Sydney’s Hot Housing Speculators Spark RBA Alarm at Fallout Risk. A 16 percent jump in Sydney house prices in the past year is sparking alarm at Australia’s central bank. Buyers shouldn’t be overly bullish in property purchases, Reserve Bank of Australia Assistant Governor Christopher Kent said at a Bloomberg Summit in Sydney yesterday. An investor-led surge in prices may amplify any subsequent fall and risk a drop in consumer spending, hurting the economy, the bank said yesterday in minutes from its Sept. 2 board meeting.

• Asian Stocks Rebound on China as Dollar Drops Before Fed. Asian stocks climbed, halting the longest slump in the regional index since 2002, while industrial metals jumped on a report China’s central bank is boosting stimulus. The dollar weakened against emerging-market currencies before the Federal Reserve reviews interest rates. The MSCI Asia Pacific Index added 0.1 percent by 9:57 a.m. in Tokyo, rising for the first time in 10 days as the Kospi index in Seoul climbed 0.6 percent and New Zealand shares rose.

Wall Street Journal:

• Ukraine Moves Reflect Moscow's Long Shadow. Parliament Ratifies Deal with Europe After Concessions, While Rebels Hedge on Autonomy Plan. Ukraine sought to draw a line under its confrontation with Moscow by ratifying a landmark trade-and-political deal with the European Union and approving limited autonomy for territories now controlled by Russia-backed separatists. But with full implementation of the EU deal postponed under Russian pressure, and the rebels insisting on independence, the developments illustrated Kiev's weakened position—almost a year after Moscow began flexing its muscle to keep the ex-Soviet republic in its orbit.

• Credit Suisse Loans Draw Fed Scrutiny. Regulator Demands Bank to Address Problems With Leveraged Lending. Credit Suisse Group AG is under fire from U.S. regulators over concerns the bank isn't heeding warnings to stop making loans regulators see as risky, according to a person familiar with the matter. The Swiss bank in recent weeks received a letter from the Federal Reserve demanding the bank immediately address problems with its underwriting and sale of leveraged loans, or high-interest-rate loans used by private-equity firms and...

• Fed Dims Emerging Markets' Allure. Fears of higher U.S. interest rates are prompting fund managers to cut back on investments in emerging markets. For now, investors still are moving into developing markets, though the pace has moderated. Emerging-market stocks and bonds received $9 billion from investors in August, compared with an average $38 billion a month between May and July, according to the latest data from the Institute of International Finance. But...

• Ebola's Warning for an Unprepared America. The slow response to the worsening crisis in Africa shows how vulnerable the U.S. is to bioterror or a pandemic.

• ObamaCare and American Resurgence. America needs a change of direction domestically to cope with a dangerous and disorderly world.

Fox News:

• Watchdog: More coal power plants to close than expected.

CNBC: 

• Russell 2000 a concern as Cashin alludes to 'Death cross'. (video)

Zero Hedge:

• How Financial Bubbles Fester And Burst - Even As The Fed Says Not To Worry.

• Citi Warns Moody's May Put France On Downgrade Review This Friday. (graph)

• U.S. Targets Islamic State's Lucrative Oil Smuggling Operations. 

• Economic Policy Treats Symptoms, Not Underlying Causes.

• Ukraine Currency Crashes To Record Low As IMF Blasts "Gross Abuses". (graph)

• The U.S. National Debt Has Grown By More Than A Trillion Dollars In The Last 12 Months. (graph)

• 4 C’s That Could Change The Financial World As We Know It, Again.

• Subprime Is Back With A Vengeance.

• How Banks Continue FX Rigging Right Under The SEC's Noses.

Business Insider:

• The Ultimate Billionaire Status Symbol In China: Leaving The Country.

• Biotech Company Auxilium(AUXL) Explodes After Takeover Offer.

• Cloud Computing Company Rackspace(RAX) Isn't Selling Itself And Now Its Stock Is Crashing.

• The US Is Gushing Oil. (graph)

Reuters:

• Microsoft(MSFT) boosts dividend 11 pct, adds new directors. Microsoft Corp on Tuesday announced the smallest percentage increase in its quarterly dividend since 2009 and appointed new directors to replace two board members who decided not to seek re-election. 

• Foreigners snub long-term US assets for 2nd month in July. Foreigners sold long-term U.S. securities in July for a second straight month, led by outflows in Treasuries, stocks, and corporate bonds, data from the U.S. Treasury Department showed on Tuesday. Net sales of long-term U.S. assets notched $18.6 billion in July after $18.7 billion the previous month. Including short-dated assets such as bills, overseas investors bought $57.7 billion in U.S. assets, recovering from outflows of $142 billion in June.

• Calpers exit could heap pressure on hedge fund fees. The California Public Employees Retirement System handed fellow U.S. pension funds a hefty club to beat down hedge fund fees and demand better returns this week when it voted to pull out of hedge funds entirely, investors said.

Xinhua:

• Calls For China Stimulus Suggest Lack of Faith. Calls for stimulus policies including interest rate cuts following negative economic data suggest a lack of faith in China's reform efforts, an unsigned commentary said. Hoping for stimulus policies in the face of increased economic pressure is short-sighted and does no good to long-term economic development. China has enough tolerance and policy tools to deal with economic slowdown.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -.25% to +1.0% on average.

• Asia Ex-Japan Investment Grade CDS Index 94.0 -1.0 basis point.

• Asia Pacific Sovereign CDS Index 65.50 -1.0 basis point.

• FTSE-100 futures +.27%.

• S&P 500 futures -.05%.

• NASDAQ 100 futures  -.07%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (GIS)/.69

• (LEN)/.67

• (CBRL)/1.56

• (FDX)/1.96

• (UNFI)/.65

• (PIR)/.13

• (MLHR)/.47

Economic Releases
8:30 am EST

• The CPI for August is estimated unch. versus a +.1% gain in July.

• The CPI Ex Food and Energy for August is estimated to rise +.2% versus a +.1% gain in July.

• The Current Account Deficit for 2Q is estimated at -$113.4B versus -$111.2B in 1Q.

10:00 am EST

• The NAHB Housing Market Index for September is estimated to rise to 56.0 versus 55.0 in August.

10:30 am EST

•  Bloomberg consensus estimates call for a weekly crude oil inventory decline of -1,244,440 barrels versus a -972,000 barrel decline the prior week. Gasoline supplies are estimated to fall by -105,000 barrels versus a +2,381,000 barrel gain the prior week. Distillate inventories are estimated to rise by +635,000 barrels versus a +4,094,000 barrel gain the prior week. Finally, Refinery Utilization is estimated to fall by -.52% versus a +.6% gain the prior week.

2:00 pm EST

• The FOMC is expected to leave the benchmark Fed Funds Rate unch. at .25%.

• The Fed's pace of QE in September is estimated to fall to $15B versus $25B in August. 

Upcoming Splits

• (CYT) 2-foor-1

Other Potential Market Movers

• The Yellen Press Conference, UK GDP report, weekly MBA mortgage applications report, BofA Merrill Healthcare Conference, (SYK) analyst meeting, (AIG) investor day and the (VFC) investor meeting could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by industrial and technology shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 75% net long heading into the day.