Greek PM Alexis Tsipras realized he has made a grave mistake not accepting the bailout and calling a referendum hoping the citizens would support him. After two days of bank closures, limited ATM withdrawals and all Greek credit cards invalid for purchases outside Greece the enormity of the mistake is hitting home.

Market Statistics

On Tuesday, Tsipras sent a two-page letter to the EU Finance Ministers saying he was willing to accept some of their conditions if they would immediately give Greece some cash and extend the Greek bailout for two more years. Unfortunately, Tsipras has already burned his bridges and you can use whatever analogy you like for his predicament. The toothpaste cannot be put back in the tube. The bell cannot be unrung. The one I like best is you cannot retrieve a grenade once it has been thrown.

The Tsipras grenade brought Greek commerce to a screeching halt and the majority of citizens are becoming hostile. Their phones are being cutoff for nonpayment, their iTunes charges are being denied and their cloud backups are being deleted for nonpayment. All of this because of the capital controls preventing citizens from transferring money out of the country. Yes, using your Greek bank issued credit card is a money transfer and is now prohibited.

With ATMs limiting withdrawals to 60 euros, most ATMs out of cash and the banks closed for a week the economy is coming to a sudden halt and Greek citizens are becoming increasingly hostile.

The Tsipras letter to the EU Finance Ministers was a Hail Mary pass and it was quickly deflected by Angela Merkel. She said there will be no checks written and no discussions held until after the Sunday vote. The EU leaders made it perfectly clear. A yes vote means staying in the eurozone and accepting the bailout conditions. A no vote means no further loans and leaving the eurozone is a likely event. With Greece in shutdown mode as a result of Tsipras actions the likelihood of a yes vote is rapidly gaining momentum. Tsipras will have failed in his campaign promises and he will probably resign.

Even while he is pleading with the EU to reopen negotiations and give Greece more money, he is still telling Greek citizens to vote no on the referendum. After a week with no banks, no money and no credit, Greek citizens are not likely to vote for economic suicide on Sunday.

The EU, ECB, IMF, known as the troika, finally had enough of Tsipras. When the deadline was looming and he decided to fight the troika with his sudden call for a referendum he forgot one important detail. You do not jump bare handed into an arena filled with gladiators and expect to win. Tsipras had no weapons to use against the troika and they had several large weapons to use against him. The troika was holding all the cards, and the money, with the ECB funding of Greek banks as their ace in the hole. When he announced the referendum the ECB countered with a halt in funding for the banks. Game over. From that point Tsipras had nothing to counter attack with and the troika will win this fight.

The market rebounded this morning on the knowledge that the outcome of the battle was already decided. It declined in the afternoon because the headlines will remain with us for the rest of the low volume holiday week and investors are worried some new headline will disrupt the market again.

The economic calendar was light with only the Texas Service Sector Outlook and Consumer Confidence. The Texas report rose from 1.1 in May to 4.1 in June. The revenue component surged from 3.8 to 13.2. This is the most important component in the index. The 3.8 reading in May was a three-year low. However, the employment component declined from 8.9 to 5.1 and the hours worked component fell from 1.9 to 0.1. The retail sales component rocketed higher from -10.7 to 13.1. Apparently, the service sector in Texas is improving despite the slowdown in the energy activity.

Consumer confidence for June soared +6.8 points from 94.6 to 101.4 thanks to a sharp spike in the expectations component. Present conditions rose from 107.1 to 111.6 and expectations rose from 86.2 to 94.6. Respondents said they were better off financially and 17.5% expected gains ahead.


The next two days are chock full of big economic news. The Nonfarm Payroll report has been moved up to Thursday because of the holiday on Friday. That means traders will have only a few hours after the ADP Employment on Wednesday to adjust positions ahead of the Nonfarm report on Thursday. In a low volume week these two reports back to back with the ISM Manufacturing report in the same period we could see some additional volatility.


This would normally be a very quiet week for stock news. Companies that are not going to warn on earnings are moving into their quiet period and press releases will dry up. Those that are going to warn would normally wait until Thursday after the bell if possible in order to escape notice by the majority of investors that have already left for the holiday.

Wynn Resorts (WYNN) rallied nearly $5 after China relaxed the visa restrictions on travelers headed to Macau. Travelers holding mainland China passports can now stay 7 days, up from the current limit of 5 days. The time was shortened last year after the government claimed citizens were cheating by claiming they were visiting other destinations but really only staying in Macau. Another change was in the time between visits. Gamblers can now visit twice every 30 days rather than twice every 60 days. Another big drag on casinos is the imposition of a total smoking ban several months ago. Since most wealthy Chinese gamblers are also smokers it further limited the number of gamblers.

June was expected to see the biggest decline in Macau casino revenue ever. Apparently, the Macau economy had fallen to the point where China had to do something to support it. Macau is relatively independent but it is still one of two "special administrative regions" that is broadly governed by China.

Casino revenue for June should be reported later this week and the rebound by WYNN and others could be short lived. The 5% rebound in WYNN was miniscule compared to the -36% decline since February.


The China stock market had a rare up day with a +2% gain. That came after yesterday's close at 4192 and an 18.8% decline from the highs. However, the intraday low today was 3847 and a -25.5% decline from the highs. The volatility was extreme but the dip was bought.


Wives are not the only people that change their minds on a whim. ConAgra Foods (CAG) announced it was selling the store brands packaged food business. This is significant because it just spent $5 billion two years ago buying Ralcorp to increase its exposure in this area. The CEO said it wants to spend the money improving the market share for its name brand products like Chef Boyardee, Slim Jim, Banquet, Healthy Choice and others. Jana Partners bought a 7.2% stake in early June because of disappointing results by ConAgra. Shares rose only slightly after a big opening drop.


Apollo Education (APOL) was expelled by investors today for bad grades. Shares declined -17% after the company provided soft guidance for 2016. Enrollments are expected to drop -25% to 150,000, stabilize in 2017 and then return to growth in 2018. That is a long-term view that is not very appealing.

Earnings of 44 cents, declined -28%. Revenue of $681 million declined -14%. University of Phoenix revenue fell -17.7%. New enrollment declined from 33,900 to 29,400. Total enrollment fell -14.5% to 206,900. With expectations for a decline to 150,000 Apollo got a failing grade from investors. Shares fell to a 15-year low at $12.88.


Bond insurers Ambac Financial (AMBC) and MBIA (MBI) are in free fall after the governor of Puerto Rico said the commonwealth was in a debt spiral and could not pay the $1.9 billion due this week. He said it was "unlikely" Puerto Rico would repay all its debt. Both companies have guaranteed billions in Puerto Rican debt and the outlook is not good.

Puerto Rico owes a combined debt of roughly $72 billion and the most per capita of any U.S. state. Puerto Rico is home to 3.6 million people. As recently as last week, some analysts expected Puerto Rico to pull out of its crisis and honor a plan to repay the debt. In theory a chapter 9 bankruptcy is not an option and hedge funds may have the most to lose.

Major funds including OppenheimerFunds, Franklin Templeton, Citigroup, Paulson & Co, Davidson Kemper, Brigade Capital, Fir Tree Partners and others have been buying up Puerto Rican debt because of the high yields and their inability to file bankruptcy. One analyst claimed 53% of U.S. open-end bond funds have exposure to Puerto Rican debt. A lot of the debt is on utilities such as their power monopoly Prepa and cannot access chapter 9 bankruptcy protection. Creditors can sue for payment. Prepa facilities are so old and outdated they still burn crude oil to generate power.


The decline in Western Digital (WDC) accelerated with another -4% loss today. The hard drive maker was downgraded last week because of slowing demand in the enterprise space and Micron's warning about falling PC demand. Western Digital makes mechanical hard disk drives and the real enterprise demand is moving to solid-state drives called SSDs. A SSD is just memory chips configured to look like a hard drive to the computer. Instead of spinning drives, it is just software to manage the data in memory. SSDs are significantly faster than hard drives and the cost per gigabyte is falling so rapidly that companies can afford to buy a faster SSD for the same price as an enterprise hard drive.

Hard drives are not going away because there are reasons why you would want to keep your long-term data on an actual drive rather than on a group of memory chips that can degrade over time. However, Western Digital may continue to decline until the Windows 10 upgrade cycle later this year.


Markets

The markets opened with a bang this morning with the Dow gaining +105 points but the selling was immediate. The Dow fell back into negative territory by 12:30 after Merkel said no to the Tsipras offer letter and no discussions at all until after the vote. This pushed the indexes to their lows but the dip buyers were ready and waiting. With the S&P at five-month lows, this appears to be a level some investors are willing to buy.

The Dow rallied back to 17,715 and the high of the day at 2:PM but sellers were still ready to unload some more shares and the rebound did not last long.

The S&P had a solid top at 2074 that ended the morning and afternoon rallies. The low for the day at 2056 was just 2 points above the 200-day average at 2054. This should be decent support with 2040 the next level if the 200-day fails.

The percentage of S&P stocks above their 50-day average declined to 27% on Monday and rebounded slightly today to 30.4%. That is hardly encouraging. The number of new 52-week lows on Monday were 620 and well above the 150 per day average the prior week.


The percentage of stocks with a P&F buy signal on the S&P declined to 58.6% and the lowest level since October. As of Friday 45% of the stocks in the S&P were in a bear market with declines of 20% or more.


Despite today's rebound, the market internals are still weak. Volume today was 7.6 billion shares and slightly higher than Monday's 7.3 billion. Advancers were only about 4:3 over decliners. That is hardly bullish considering the magnitude of the decline on Monday. Yesterday decliners were 8:1 over advancers and down volume was 9:1 over advancing volume. Monday could be considered a washout with cascading selling and grossly skewed internals. Today was not a typical rebound but I attribute that to the ongoing headline war from Greece and the desire to be flat rather than invested until after the holiday.

Support on the S&P is 2054-2056 and resistance 2074. Should either be broken on Wednesday that could be the direction for the rest of the week. Those holding losing positions now are hoping for a continued rebound so they will not have to sell. If the market continues lower, a move below 2054 could be the sell signal they are fearing and a reason to exit. Those who are looking for a signal to buy would like to see a move over 2075 as a signal the worst is over and Monday was the bottom.

One negative is the break below the 150-day average. That has been support since September and it failed. That makes the 200-day even more important for the rest of the week.


The Dow was helped the most by the rebound in Goldman, Disney and Apple. The Dow broke below the 200-day qt 17,679 on Monday and tried to move back above it with the 17,714 high but could not hold the gains.

Today's low of 17,576 was a lower low and suggests the Dow could be vulnerable to further declines. However, the 17,585 support from March is the level to watch. That was broken for a few seconds today but the rebound was immediate.

Resistance will be that 17,714 high from today, which was tested twice.



The uptrend on the Nasdaq was crushed with the -122 drop on Monday. Today's +28 point rebound was decent but resistance at 5000 was solid. Given the problems the big cap techs had over last week I am not as encouraged by the rebound on the Nasdaq. While I hope the rebound is lasting I am worried by the minor gains. The biotech sector was the only major winner for the Nasdaq and that was responsible for the majority of the gains.

Resistance 5000, support Tuesday's lows at 4970.




The Russell 2000 small caps were knocked back to the 100-day average at 1247 on Monday with a close at 1246.75. You do not get confirmation of support much better than that. Today the index tacked on +7 points to 1253 and support held.

The Russell should have a positive bias this week from left over rebalance adjustments. Let us hope the rebound continues. It was not as strong as I would have liked so there is a concern there could be more profit taking from the two-month rally.


Europe does not appear to be too concerned about Greece. The European markets were down about 1.25% on Tuesday but that is not earth shaking. The key point here is that the euro currency has been flat. There was a little spike on Monday but that was erased today. The euro is not in danger and that suggests Europe has ring fenced the Greek problem. If the European markets are up on Wednesday I would expect the U.S. markets to follow.



The rest of the week should be a whirlpool of conflicting events. The Greek headlines will continue to rule but the economic suicide is now priced into the market unless something else appears to worsen or improve the situation. If Greece votes yes to accept the creditor demands and remain in the eurozone then the market should rally on Monday, assuming the votes are counted in time. This means we could see some speculative buying ahead of the holiday weekend.

Wednesday is also the first day of the new quarter and half and there should be some month-end retirement contributions being put to work. That could help lift the markets. Offsetting that will be actively managed funds that window dressed their portfolios going into the end of the quarter. They may decide to undress those windows once into July.

 

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