Markets on SALE (Again)

Markets on SALE again this morning as investors react to all the new data.....In Asia - China reported that industrial profits PLUNGED by 8.8% y/y - the largest decrease since 2011. Analysts came out saying this is "No Surprise" - considering the weekly WEAK eco data that China has been reporting for months now.....

Yating Xu - Economist at IHS Global had this to say -

"Slowing profit growth in China's midstream sectors is reflective of output price declines deteriorating at a faster pace than the input price. Headline profit growth is unlikely to improve in the short term and the downstream sectors will be affected in the long run if economic growth continues to slide and drag on consumption. Further fiscal stimulus is expected in 4Q give the weak 3Q performance"

Yeah - what he said.....

Next up for China - Thursday's report on Sept PMI and the final Caixin/ Markit PMI - these reports will be closely watched...will they remain well below 50? (Answer: Yes).

In Europe mkts are getting clocked - FTSE -1.54%, CAC 40 -2.11%, DAX -1.41%, Eurostoxx -1.68%, Spain -0.71% and Italy -1.57%. after the disappointing Chinese data. All this talk of a weaker China is getting a bit long in the tooth now, no.....so just take them out behind the woodshed and get it over with - this daily punishment on global mkts is like Chinese water torture..... Elsewhere in Europe - some of the banks are under pressure at it is reported that the Swiss regulatory authority opened an investigation into 'possible manipulation' of the precious metals mkts by a bunch of banks - UBS, Julius Baer, DBK, HSBC, Barclays, MGS and Mitsui......

US futures are now down 12 pts.....testing the 1900 level.....this is no surprise really - we have been saying this for weeks now.....the mkt has suffered since the August break and now the risk models are all recalibrating valuations based on the daily data that is reported....and don't discount the latest DC drama...

As if it couldn’t get any tougher for the mkts – it just did….On Friday – House Speaker Boehner – visibly exhausted stood up and waved the 'white flag' announcing his surrender and resignation not only from the speakership but also from the House of Representatives – saying that the threat of another gov’t shutdown created by one faction of the party has gone on for too long.

“My first job as speaker is to protect the institution. It had become clear to me that this prolonged leadership turmoil would do irreparable harm to the institution”

The turmoil he is speaking about was trying to

‘command a Republican majority with scores of lawmakers (think Ted Cruz and the Tea Party) who had no interest in working things out but were willing to risk the party’s brand and unleash economic and governmental havoc over policy fights’

By stepping aside now, he does do something helpful....he decreases the chances of a gov’t shutdown this week because now the majority of republicans and democrats will go forward with a ‘short term funding option’ to keep the gov’t up and running thru December sending Ted Cruz (Currently polling at 8%) and the far right wing into solitary confinement for now (and that is the kicker to be concerned about.)

On Saturday the headlines told the story…… The NY Times headlines with

“Boehner to Quit, Undone by Strife with Right Wing”

The WSJ runs with

“Boehner Cites Fear of Turmoil in Decision to Exit – Republican House Speaker has long been under fire from conservatives in his caucus”

When asked by the WSJ – Representative David Jolly (R, FL) had this say –

“The honor of John Boehner today stands in sharp contrast to the self serving idiocy of those in our party who continue to seek to divide us”

‘The idiocy of those in our party’? That’s one way to put it…..Washington is a mess – and that has been made clear by the 3 top Republican Presidential candidates – all NON politicians and this latest circus act only serves to solidify the sense that something needs to change – and that change could well rock the very core of the GOP at a critical time in the Presidential election cycle.

Make no mistake - Boenher’s resignation comes at a critical time for the country, it disrupts the power grid on Capitol Hill and it has the potential to change the outlook for monetary policy going forward. How? You ask.......First - it most likely will not shut the gov’t down on Thursday because now Boehner is no longer committed to trying to work with the right wing – he can saddle up with the democrats and get a 'short term deal' done to keep the gov't operating – because in 35 days he is calling it quits – he essentially told the Tea Party where to stick it....essentially saying: “I don’t care what you think!”

And why the far right wing thinks this is a good idea is beyond understanding..... In fact – all of this strife and turmoil only gives Hillary and the democratic party that much more ammunition as they point to a party that is clearly fractured and in distress.

Next - The short term funding option just kicks this can down the road to guess when? That's right - December! And what Janet Yellen and her band of Merry Men does NOT need is a December gov't crisis considering that her interest rate hike date is favoring the December 15th/16th FOMC meeting which will be the same time as a possible gov’t shutdown/debt ceiling crisis…...Do you see where we are going? Stay tuned because this plot is under development and will surely add a new dimension to the current environment.

Ok so back to the mkts – Friday saw the mkt opened strongly (but then gave it all back by 4 pm) on the Yellen speech from Thursday evening when she made clear that she is becoming more of a hawk than a dove as the debate over a rate hike rages on. European investors loved her speech sending those mkts rocketing higher……

Now here at home - the broader mkt initially embraced it - although not with the same gusto as the Europeans did and while most of the mkt held up well..... banks, insurance co’s, and brokers loved it, tech stocks were mixed while health care and drug makers continued to suffer - Biotech's got clobbered again on Friday, as so many analysts cited the continued comments by Hillary about 'taking on the industry' and now the uncertainty created by the Boehner resignation and the resulting balance of power... causing the XBI (Biotech ETF) to end the day down 6.8% ($67.50) or a total of 15% from the Sept 17th highs of $80

[Now understand that the trouble for the Biotech's started when Turing Pharmaceuticals raised the price of one of its rarely used drugs by 5000% overnight.....Outraging the public, politicians and Doctors.....No wonder that there is a revolt against the biotech's....so expect to hear much more about this in the coming election....]

This week brings us so much......1. End of qtr 'Window Dressing' period, 2. We are on the cusp of another earnings season - sure to be fraught with more potholes than usual, 3. A fair amount of US macro data and 4. A parade of Fed officials speaking at different events around the country....Talk about confusion and lack of clarity.....

All this all on top of a Wall St that has been very skittish lately – skittishness that has been created mostly by the scare of a slowing China and other emerging mkt countries. Now add in the looming crisis brewing in DC and we should expect the skittishness and psychotic mkt action to continue as global investors now have to add in the latest gov’t drama to their risk models allowing some to suggest that the models will signal “Risk Off” at these levels. The question then becomes – when will they suggest Risk On?

Recall the events of August 24th when the mkt dropped 1000 pts in 6 mins.........Mkts react and trade differently today due to the automation and host of derivative type products that give instant access and instant exposure to whole sectors, countries, and strategies- moves of 1000 pts or more can and do happen in mins (a la August 24th). What would prevent even more drastic moves before we hit the circuit breakers? (Answer: Nothing.) Large asset managers and Hedge Funds will place bids where there models suggest is fair pricing and that may not be inline (just fyi).

In between here and there - there are obligated market makers (NYSE) and voluntary market makers - (those are the off floor ones) that are supposed to help cushion any move higher or lower until natural buyer meets natural seller.

So the question is: Will we see all of those ‘voluntary off floor market makers’ step in to help provide that ‘liquidity’ that they claim to or will they 'voluntarily stay home' like they did on the 24th? (Remember - market makers on the NYSE are obligated to stand there and put the capital on the line every day). If the voluntary market makers choose to take their ball and go home until the dust settles then they can't scream and yell about how stocks traded like they did in the days following the breakdown. I'm just sayin.....either you are in or you are not....What will it be?

Look for the S&P cash to test the 1920 level - and if it does not hold then 1900 is the next stop - more so only because it is a round number...the real level would be the lows of August at 1860. Now I don't expect that to be today - but do not be surprised when it does happen. End of qtr window dressing will take center stage as asset managers re-allocate for end of qtr reporting. That is sure to cause more volatility in the days ahead.

Today we will get an Obama/ Putin meeting at the UN General Assembly, the Senate to advance that bill on gov’t spending thru Dec 11th and NY Fed Pres Dudley to speak about the US economy. Eco data includes:
Later on in the week – we will get ADP employment numbers – exp of . IMF Managing Director Lagarde to discuss the global economy and on Thursday – the possibility of a gov’t shutdown if congress fails to pass the funding bill. On Friday we will get the all important NFP report - exp are for +220k jobs – not good but not bad either

Vellutata Di Verdura -

Feels like a 'good soup' day.......Try the Vellutata di verdure.....(Vegetable Soup)

A vellutata is basically a cream sauce - a hearty delicious vegetable soup bathed in a cream sauce....easy to make and delicious to eat.....Try it - You won't be disappointed.

For this you need:
Olive oil, chopped shallots, dice peeled butternut squash, 1 med zucchini diced -, celery diced, carrots diced, potato, peeled and diced, s&p, cecci beans, chicken broth, all-purpose flour, butter, whole milk, and a baguette - cut into rounds that you have lightly buttered and toasted.....

In a large saucepan, heat oil over med high heat - Add shallots, squash, zucchini, celery, carrots, potato and s&p. Cook, stirring occasionally, 3 minutes. Now add 2 cups broth, bring to a simmer and cook until vegetables are tender, about 10 minutes.

Meanwhile, in a small saucepan, whisk together flour and room temp butter. (maybe like 3 tbls flour to 1/2 stick of butter), Add ź cup milk and whisk to combine, then add 3 more cups of milk, 1 cup broth. Place on med heat and stir......bring it to a simmer then remove.

Add milk mixture to the vegetables, bring to a simmer and cook, stirring occasionally, until ingredients have blended....taste, adjust and Boom! It is ready......Serve the soup in warm bowls and top with a toasted round.....you can have grated cheese on the side if you wish.....

Buon Appetito.