On Wednesday a rumor that Germany might be ready to offer Greece a way out of its troubles caused a major short squeeze. News on Friday that the IMF had broken off talks and left the country caused exactly the opposite reaction with the Dow falling -182 at the open as EU officials began to prepare for the worst-case scenario for Greece.

Market Statistics

Add in the worry over the Fed meeting next week and investors did not have a good reason to hold stocks over the weekend. Those that rode the short squeeze higher took profits and moved to the sidelines.

Economic reports continued to surprise to the upside ahead of next week's FOMC meeting. While nobody expects a rate hike next week the possibility was back on the table. A hike in September appears to be almost assured assuming the economy doesn't fall off a cliff over the next two months.

The Producer Price Index (PPI) for May rose +0.5% and slightly over consensus of +0.4% but much better than the -0.4% decline in April. This was only the second monthly increase in 2015. However, the major driver was a +5.9% increase in energy goods. Core prices only rose +0.2%. The PPI on a trailing 12 month rate of -1.0% is still very weak but improving. Food prices rose +0.8% and the largest increase in two years.

Consumer Sentiment for June rose sharply from 90.7 to 94.6. The +3.9 point gain failed to erase May's -5.2% decline but it was a good start. The present conditions component rose from 100.8 to 106.8 and the expectations component rose slightly from 84.2 to 86.8. The increase in sentiment came mostly from 44% of respondents claiming they were better off today than the same period in 2014. That was up from 41% in May. At the same time only 23% said they were worse off, down from 30% in May.

It would be hard to draw any conclusions from the volatility in the sentiment numbers but on the surface it appears the arrival of summer has lifted spirits.


Next week we get the housing numbers for May. You may remember that housing starts for April hit a seven-year high at 1.135 million. Analysts are expecting that rate to decline. They feel the April numbers were post winter recovery and May will fall back to a more reasonable pace. As long as the results are in the vicinity of the 1.1 million estimate it should not bother the market. If they fall under 1.0 million it would be very negative. Residential construction is on Tuesday.

The Fed meeting on Tue/Wed and the Yellen press conference on Wednesday afternoon is going to be the major market hurdle. While the Fed is not expected to hike rates at this meeting anything is always possible. What analysts will be looking for is guidance that targets the September meeting as the liftoff date.

The Philly Fed Manufacturing Survey on Thursday is expected to rise from 6.7 to 8.0. This is for the June period. The range of estimates are from 7.5 to 10.0 so everyone is expecting an improvement in conditions. Should the headline number decline it would be market negative.


Netflix (NFLX) shareholders approved the addition of 5 billion new shares over the existing 60 million. This paved the way for the company to split its stock. The announcement was expected after the shareholder vote but the CEO said he would pursue the matter with the board in "due course." This disappointed many shareholders and the share price fell -$33 from the Wednesday high to close at $661 on Friday. I expect the company to announce a 10:1 split in hopes of getting the share price down enough to be considered as a new Dow stock.

Netflix earnings are July 15th so a split announcement could come at any time before earnings or with the earnings release. The company already said it was going to split once the additional shares were approved so now it is just a matter of timing and split ratio.


Unless you live in a cave you probably heard that Twitter's embattled CEO Dick Costolo finally said he was stepping down. Starting on July 1st co-founder Jack Dorsey will take over as CEO on an interim basis. Analysts claim this could be the opening round in what could be a takeover battle for Twitter. Google and Facebook had previously made offers for the company but Costolo was seen as a roadblock. With Dorsey also the CEO of Square he will have his hands full managing both entities. Twitter said they would be looking both internally and externally for the next CEO.

A major Twitter investor, Chris Saca, posted an 8,500 word rant last week on how to improve Twitter. He said Google and Twitter would be an "instant fit" since Google has flopped on the social network stage. Back in April Google agreed to help Twitter sell and measure promoted tweets paid for by advertisers. In May Google began showing tweets in their search results.

In a conference call on Thursday the board said it would "carefully evaluate" any offer while they were searching for a new CEO. However, Dorsey said they believe they can "maximize value" best as an independent company. Of course he had to say that to have any hope of getting a fair price for the company if someone made an offer.

Others claim the CEO transition would not have happened if they actually had any active interest in someone buying the company. The acquisition would have happened in lieu of Costolo leaving up front and his exit would have been planned once the takeover was complete.

Investors must not have had much faith in a white knight appearing soon because shares gained only six cents on Friday. That is hardly a surge in buying on expectations for a sale.

Personally the January $40 call is looking attractive. After all how much worse can a new CEO do and there is always the chance for a buyer to appear.


LeapFrog (LF) shares fell -26% on an earnings miss. Ok, it was only -53 cents but to investors that still own the shares it was painful. Sales fell -40% to $33.9 million and the company posted a 56 cent loss. Analysts were expecting a 21 cent loss. The company said shrinking demand for tablets and related content impacted sales. Retailers were still working through leftover inventory from the holiday season and were not reordering. A planned release of the LeapTV video game platform was also delayed. This company may have just leaped into disaster. Very few come back from a setback this severe.


Alibaba (BABA) was finding no love last week as four companies downgraded the stock. Deutsche Bank cut its target price to $102. HSBC cuts its price from $136 to $124. Macquarie Research cut its target from $105 to $92 and RBC Capital lowered the target from $110 to $105. The brokers slashed their targets after the Alibaba investor meeting downplayed some aspects of its business.

The average price target from all brokers is $107 but BABA shares are headed in the other direction. HSBC cut expectations for profits by -9% and revenue by -3%. RBC Capital also cut estimates. One factor is that Alibaba halted online lottery sales in February thanks to a crackdown by the Chinese government. Alibaba also reduced its advertising fees and commissions on the group-buying website Juhasuan. That suggests business is not doing well on that site.

Brokers were concerned about how easily the business can be impacted by government policy decisions and the ongoing worries over the sale of counterfeit merchandise. MyBank, an online bank backed by Alibaba is getting off to a shaky start because of constraints by risk-averse government regulators. The bank is launching without U.S. technology because the Chinese government wants to purge U.S. tech from the domestic financial system. The Chinese government instructs companies to avoid IBM, Oracle, EMC Corp and others and recommends Chinese technology instead. China has dubbed the financial sector as IOE out or "de-IOE" with IOE the first letter of each company's name.

In a speech last week in the U.S. CEO Jack Ma said in "another life" I would never have taken Alibaba public. He said the challenges of running the company were hard enough but now that it was public it was extremely hard to run. This suggests he is struggling with having to be open about Alibaba's challenges with authorities and regulators and with investors pointing fingers at every crack in the business. It is much easier to run a company without millions of investors providing oversight and second guessing every decision you make.

Alibaba also has 1.2 billion shares still to expire from lockup in September. That could be a significant weight on prices in the months ahead.


Eli Lilly (LLY) declined -3% after expected data from the Alzheimer's Association may not be made public as expected. The group was expected to post abstracts of detailed trial findings on its website ahead of the conference planned for July. However, data in the abstracts would have been subject to an embargo preventing the public release until the conference. Only those registered for the conference would have had access. However, that raised questions on whether their access would have allowed and influenced stock market trading. The group said on Friday it was reconsidering the plan.

Lilly shares had risen +7% earlier in the week on expectations the data to be presented was going to be positive. The drug in question was solanezumab and Lilly had previously said the abstracts would have all the clinical data on the trials rather than just limited information. Normally they would only do that if there was a positive result to brag about.


Lumber Liquidators (LL) spiked +12% to $23.20 intraday on double the average volume on rumors there was a potential acquisition of the troubled company in the works. The company gave the standard answer of "we don't comments on rumors or speculation." Shares declined to +4% at the close. With more than 10,000 complaints that could turn into suits there is plenty of trouble ahead for anyone making an acquisition offer. It would be better to have them file bankruptcy and then buy the company out of bankruptcy.


Radio Shack filed the final plan in bankruptcy court for liquidation of its remaining assets. The plan follows the sale of 1,700 stores and the brand name and customer information to Standard General LP. The hedge fund plans to run the stores under a co-branding deal with Sprint.

The remaining assets will be placed into a liquidation trust and the proceeds will be distributed to creditors on a prorate basis depending on the type of claim they filed. Gift card holders have 60 days to make a claim or lose their credits.


Over the weekend Greece and EU Commission president Jean-Claude Juncker are locked in last ditch talks with a goal of reaching a deal before the market opens on Monday. While the odds are slim they are at least talking. Prime Minister Alexis Tsipras set a delegation to Brussels on Saturday with a new set of proposals in hopes of closing differences on problem areas including pensions, taxes and surplus targets.

An EU official said this was the last attempt by the EU to form a compromise. The IMF and ECB are supposedly waiting in the wings for a signal to rejoin the discussions if progress is made by Juncker. The Greek stock market declined -5.9% on Friday alone and yields on the Greek 2017 bonds rose +137 basis points to 20.03%.

Since some EU parliaments have to ratify any deal before funds can be dispersed and before the entire bailout program currently in place expires on June 30th there is little time left for negotiations. If something is not agreed by early next week the entire bailout process will collapse on June 30th and a new full fledged agreement will have to be negotiated and Greece will default on numerous payments before that can happen. Greece has 1.5 billion euros due June 30th and another 7 billion due in July and August. They have no money left so without a deal early this week there will likely be a debt disaster in Europe.

German Finance Minister Wolfgang Schaeuble has asked his staff to conceive a mechanism where a euro state could default on its debt in an orderly way that would ensure the continuity of the currency union. Basically they are planning for the worst case scenario.

A couple years ago we gave away trillion dollar Zimbabwe bucks with the end of year special. The country suffered rampant hyperinflation in 2008-2009. It got so bad shoppers would have to carry shopping bags of currency to the store just to buy bread and milk. The country eventually ended up using the U.S. dollar as its currency but the Zimbabwe bucks still traded. That is coming to an end. The country is going to buy back all the outstanding currency and officially end the reserve bank notes.

You can now exchange 175 quadrillion Zimbabwe bucks for $5 in U.S. currency. That equates to 35,000,000,000,000,000 Zimbabwe dollars for $1 U.S. dollar. Buybacks end on September 30th. Inflation in the country hit an unbelievable rate of 231,000,000% in October 2008. The currency was devalued about twice a day. At the height of the crisis the country was printing 20 trillion and 50 trillion dollar notes. The last notes printed were 100 trillion dollar notes. At that time 100 trillion was not enough to ride the bus back and forth to work for a week.


Crude prices rallied mid-week after crude inventories declined -6.8 million barrels as refiners boosted utilization to 94.6% and the high of the year as they produce gasoline ahead of the July 4th weekend. By mid July prices could begin to fall again as demand declines.


The number of active rigs in the U.S. declined -9 to 859 and now the lowest level in more than ten years. The low in July 2009 during the financial crisis was 866. Oil rigs have fallen from 1,609 to only 635 in the last 7 months. Gas rigs have stabilized in the 220-225 range and only lost -1 rig last week.

Since OPEC said they were going to continue pumping at full production the active rigs counts could continue lower. Nobody is going to want to fight the lower price expectations for Q3 and beyond.


The Chinese markets continue to rally into the sky and we know from past experience this is not going to end well. When this bubble finally bursts it could contaminate the planet with a virus of market declines. World's Worst Bubble will Soon Burst


Markets

The short squeeze on Wednesday triggered by rumors of a deal with Greece had limited follow through on Thursday. News on Friday that the IMF had broken off talks took the air out of the bubble and the indexes slipped back below resistance. The 2110 level on the S&P and 18,100 level on the Dow proved to be solid and sellers piled on when the indexes rolled over.

The S&P managed to remain above its 100-day average at 2087 but only barely. The key level for next week is the 150-day average at 2073 and horizontal support at 2080. Should those levels break we could be targeting 2040.

This is quadruple expiration week and the first half of the week is typically volatile with declines normal. In theory the drop to 2080 last week was a test of obvious support and traders bought the dip thanks to the short squeeze. A successful retest of 2080 could setup a month end rally.

The percentage of S&P stocks over their 50-day average improved with the short squeeze but quickly deteriorated on Friday. Only 41.8% of S&P stocks are over the 50-day. More than 20% of the S&P stocks are already in a bear market with declines of -20% or more. A year ago only 4% were in a bear trend. Full story, lots of detail

Only 59.4% of S&P stocks are over their 200-day average despite a minor bounce last week.

Despite the mid-week rebound the health of the market is not good.




The Dow also made a new lower high for the week with a solid stop at resistance at 18,100. The Tuesday drop saw a close under support at 17,800 so that level could be weaker on another test. The critical support for this week would be 17,600 and the lows from March.

With energy stocks weak, Apple shares weak after the WWDC and continued weakness from some of the industrials any stocks in rally mode will have a huge burden to lift to turn the Dow positive. The conditions have not changed much since last week with the majority of the individual Dow stocks still in a confirmed down trend.

Resistance 18,100 and support 17,600.



There was no material change on the Nasdaq but the tech indexes did finish negative for the week when the Dow and S&P were fractionally positive. The Nasdaq Composite closed right in the middle of its recent support (5000) and resistance (5100) with a close at 5051. The Nasdaq is holding closer to the highs than the other indexes but the excitement appears to have faded. The tech index has been trading in that range since May 14th with Tuesday's intraday dip the only violation. It is truly range bound. Eventually it is going to break out of this pattern and we can expect an explosive move in whatever direction it picks.



The Russell 2000 small caps posted a gain for the week and closed at 1265 and right below its highs for the week at 1270. This is resistance from March. The index is trading surprisingly well ahead of the rebalance in two weeks. Russell released the first list of proposed additions and deletions on Friday afternoon. Russell 3000 changes

This means the game is officially in progress. Additions will be bought and deletions sold. The list will be refined next Friday but this is 98% correct at this point. Since those being deleted are the only ones that can impact the indexes until the change on the 26th there is always a negative bias over the next two weeks. It may be slight and can be overruled by headlines like a resolution in Greece.

I am surprised by the strength of the Russell for this time of year and in this market. We should continue to watch the Russell for clues on market direction. A breakout here could be powerful.


Even more confusing is the breakout to a new high by the Russell Microcap Index ($RUMIC). These are the smallest stocks in the Russell universe and they are outperforming everything else. No signs of a pending correction here.


The Dow Transports rebounded from the late May lows at 8,265 in a weak attempt to avoid an even bigger decline. The rebound made another lower high and the chart is still suggesting there are lower lows ahead.


I think we are at the mercy of headline risk this week. With Greece dangling by a thread over the default cliff, the Fed meeting on Wednesday and quadruple expiration we could see the market move strongly at any time. I would not be a risk investor this week. Either direction is possible and it is a coin toss as to which direction wins.

The Fed is going to reconfirm its plans to hike rates soon. Greece is going to live or die by whatever decision it makes this week. The final hours are finally here. Investors have made their bets on both of those headline events and whatever happens will play out for all to see. I prefer to watch from the sidelines. There is always another trade as long as you have capital to invest. You can recover from lost opportunity but it is very hard to recover from lost capital.

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Random Thoughts

The government now admits there were two cyber attacks against the government database and records covering more than 14 million people were stolen. The most critical data came from Standard Form 86 that people fill out when they are applying for a government job with any type of security clearance. This is the results of a deeply personal investigation into their past including mental illness, drug and alcohol use, past arrests, bankruptcies, listing of personal contacts, friends and relatives both domestic and foreign, current and past addresses, employment as well as social security numbers, personal information of both the applicant and their "cohabitants." They also got military records, veterans status information, birth dates, gender and race data, pay histories, health insurance, life insurance and pension information.

With this information Chinese agents can not only blackmail current government employees but they can also assume the identities of anyone they desire since they have 100% of their personal data. China can recruit spies as well as build accurate personnel lists of current employees in each government agency. The holders of this data can mount the "mother of all spear-fishing attacks" according to Mike Rogers, Chairman of the House Intelligence Committee.


Despite the rebound in the housing market more than 8 million homeowners are still underwater on their mortgages. That equates to 15.4% of homeowners with mortgages. More than 4 million owe at least 20% more than their home is worth. This is retarding the growth in the housing market because these people can't sell and move up and this means a large chunk of the homes in the U.S. are not turning over.


The Pentagon is poised to move significant heavy weapons and up to 5,000 American troops to several Baltic and Eastern European countries. The proposal would move main battle tanks, artillery and supplies into the newer NATO nations in Eastern Europe that was once part of the Soviet sphere of influence. Putin's takeover of Crimea and continued aggression in Ukraine is stimulating significant changes in the defensive posture of NATO nations. The idea is to send a clear message to Putin that he cannot continue his aggression into other satellite nations because the U.S. and NATO will defend those nations.

NATO was expanded in 2004 to include the Baltic nations but a decision was made at the time not to stockpile weapons that close to Russia in order to avoid creating hostilities with Russia. Now that those hostilities exist there is no reason not to bulk up the defensive posture. The equipment would be stored at U.S. and NATO bases pending decisions by the White House and NATO. The nations involved would be Lithuania, Latvia, Estonia, Poland, Romania, Bulgaria and possibly Hungary.

The initial "European Activity Set" would include 250 M1-A2 tanks, 1,200 vehicles, Bradley fighting vehicles and armored howitzers.


We talk about the Dow Transports a lot but most readers probably don't know what stocks are actually in the index. Here is a great chart showing all the components and their gain/loss for the year. This explains in one picture why the transports are falling. What is Driving the Dow Transports?


The retail sales for May came in better than expected but you have to dig down to get the real story. The data is "seasonally adjusted" by applying several factors judged appropriate by the Dept of Commerce. The Fed really needed a strong retail sales number for May to support their plans for a future rate hike. Over the last ten years the seasonal adjustment has ranged from 73.4% to 114.6% with all the normal factors considered. However, the seasonal adjustment for May was a whopping 275.5%. Apparently if you really need a positive number just ask your friends over at the Dept of Commerce and they will "adjust" it for you. Source



Since the Great Recession the manufacturing sector is down -3.2%, has 15,000 fewer production facilities and since 2007 has lost more than 2 million jobs. So why is the U.S. economy doing so well? The sector accounts for 12% of GDP and supports an estimates 17.6 million jobs. Full story


The AAII Investor Sentiment Survey changed significantly last week. Bullish sentiment declined -7.3% to 20.0% and bearish sentiment shot up +8% to 32.6%. Bullish sentiment is now the lowest since April 2013. AAII wrote that unusually low levels of bullish sentiment are typically followed by better than average returns over a 6 and 12 month period. They did not say what followed in the 2-4 weeks after significantly lower levels of bullish sentiment.



The week after Quadruple Witching in June is typically abysmal according to Jeff Hirsch and the Stock Trader's Almanac. The Dow has lost ground in that week 22 of the last 25 years with an average loss of -1.1%. Source


Options on the Volatility Index are exploding higher. Open interest in call options, expecting market volatility to spike significantly, are at levels not seen in eight months. The most active call options are those expecting a significant spike in volatility over the next six days. Five of the ten most owned calls are for the VIX to spike to 23 by June 17th. The VIX closed at 13.78 on Friday. There are about 3.8 calls for every put on the VIX. Full story


Despite all the attempts by the current administration to legislate stricter gun control the effort seems to be lost on most of the public. A new Rasmussen poll found that only 22% of "likely U.S. voters" would feel safer in a neighborhood where nobody was allowed to have a gun. Sixty-eight percent said they would feel safer in a neighborhood where guns were allowed, while 10% said they were not sure.

In a Gallup poll last year the percentage of Americans that felt safer with a gun in the house nearly doubled to 63% today compared to 33% in 2000.

Source


The Fed may shake things up next week when they restate their target for full employment. In March they suggested the "natural rate" of unemployment would be something in the range of 5.0-5.2%. Unemployment in May was 5.5%. A new paper by the Fed staff suggests the target number for full employment may be lowered to 4.3%. They speculated that raising rates in a world of 5.5% unemployment could be too soon. Full story


Q2 GDP estimates are rapidly improving. The Atlanta Fed real time GDPNow forecast has risen from +0.7% growth to +1.9% growth just over the last two weeks. Positive economic numbers have dramatically stimulated the model. Atlanta Fed



The Iranian nuclear talks have "virtually stalled" according to news reports. The three conditions Iran claims it will never agree to are the snap inspections, the inspections of military bases and the timing of the release of sanctions. The P5+1 nations insist on monitoring Iranian activities to prevent a clandestine nuclear weapons program. President Hassan Rouhani said "Iran would never allow its secrets to be disclosed through the implementation of the protocols." Iran is now saying an agreement can be reached but it will likely take a "number of months" and that assumes the six countries make no "excessive demands." Those would be snap inspections and inspections of military installations. Iran has put off any agreement now for more than a decade while they continue to research and produce enriched uranium from secret nuclear installations. Claiming it could take a few more months to come to an agreement is no surprise. There will never be an agreement as long as the six nations continue to attempt pacification rather than enforcement.


Pragmatic Capitalism (PragCap.com) issued a set of tongue in cheek guidelines for financial journalism. I am reprinting them here. I think you will find a lot of them appropriate. Source

"The following rules are set forth as a general guideline for the financial journalism industry. Although the rules will not be strictly enforced any breach of the stated rules could result in substantial subtweeting, private email trash talking and substantial LOLing."

I. The Stop Scaring People Rule. Scaremongering is not to be tolerated except during the middle of a financial crisis or nuclear war. Writing scary articles for the sake of conjuring emotionally driven page views is not a legitimate business model and is generally counterproductive.

II. The Event Porn Rule. That big sports or entertainment event you’re thinking of writing about probably has no correlation with the financial markets. Please refrain from using this event as a reason to write about the markets.

III. The Crash Call Rule. That pundit who comes on TV predicting financial Armageddon every week is not a "guru" and is directly contributing to poor financial decisions. Please refrain from interviewing him regularly. Also, see Rule I.

IV. The Permabull Restriction. Interviews with permanently bullish Professors from the Wharton School are not informational, educational or useful in any way. Everyone knows the stock market is very likely to rise over the very long-term. This message does not need to be repeated every single week.

V. The Political Obfuscation Rule. Political commentaries that contradict empirical evidence will not be tolerated. If you must make a political argument please refrain from trying to square this with a financial market position.

VI. The No Warren Buffett Rule. That article about Warren Buffett is almost certainly useless. You are not the first person to write it and it is not providing anyone with anything useful.

VII. Stop The Seasonality Rule. That article about seasonality (Sell in May, the Santa Claus Rally, etc) is data mining. We do not tolerate data mining in finance and we hope you will refrain from using seasonal events to write the same article year after year.

VIII. The Taleb Rule. We know that Nassim Taleb is smarter than the rest of us, but none of us really understands anything he is saying so please stop trying to explain his views on the financial markets and economics.

IX. The Bubble in Bubbles Rule. If you feel the need to use the word "bubble" please reconsider. This word is only allowed to be used by a select few financial experts (Robert Shiller, Robert Shiller & Robert Shiller). If you are not one of the names listed in the previous sentence please do not use this terminology.

X. The Crayola Crayons Rule. Drawing lines on charts or referring to things such as "inverted hammer candlesticks" is not financial analysis. It is an adult version of drawing. It should also be noted that "head and shoulders" is a type of shampoo, not a useful market indicator. In addition, mentions of the Hindenburg Omen could result in public shaming. As much as we all have fond memories of crayola crayons and drawing this should not be mistaken as a legitimate form of journalism.

XI. The Gold Huckster Rule. That guy who tells us to buy gold every week is not providing objective financial advice. He is selling gold from his company in exchange for the things he is likely telling you to avoid (US Dollars). Please refrain from citing him as a legitimate source of financial news.


 

Enter passively and exit aggressively!

Jim Brown

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"Markets tend to return to the mean over time. Excesses in one direction will lead to an opposite excess in the other direction."

Bob Farrell

 

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