The Greek bailout or lack thereof, along with weaker economics out of China and a rate hike in Australia combined to rally the dollar and crush commodities and global markets.

Market Stats Table

Markets around the world collapsed on Tuesday on fears the European efforts to fix the Greek debt crisis would fail. The euro fell to a 52-week low and the dollar hit a 52-week high with more than a 1% gain. The Dow lost -285 points at the intraday low and only recovered slightly to close down -225. The Nasdaq was down -87 at its lows.

The weekend agreement to provide $144 billion to Greece is still not done. The upper and lower houses of the German parliament still have to vote on it this week and the IMF still has to approve it next weekend. Civil unrest in Greece is increasing concerns that the mandatory austerity programs Greece was forced to implement will not be successful.

The trouble getting a deal done for Greece has investors worried that the EU would find it almost impossible to construct a similar bailout program for larger countries like Spain or Portugal. The debt crisis in Greece has sent interest rates soaring for all EU countries. This makes it even more likely that other countries are also going to need a bailout. Where countries were struggling to pay their debt with interest rates in the 3-5% range are now going to be buried with rates approaching 8-9%. This is the equivalent of having your 3% ARM reset to 9% and your mortgage payments increase. Your mortgage balance stayed the same but the payments tripled. The weaker countries cannot afford to pay the current rates to roll over their debt. Every day the problem in Greece continues the rates increase for other EU countries.

This contagion problem caused major declines in all the overseas markets and EU banks were crushed. Credit Suisse (CS) lost -8%, Banc Santander (STD) lost -9%. Spain's market lost -5.4%, Russia -3.7%, Brazil -3.5%, FTSE -2.6%, DAX -2.6%, CAC-40 -3.3%, Greece -6.7%, Portugal -4.2% and Germany -2.6% compared to a -2.3% decline in the S&P-500.

Euro Collapses

Spain was forced to make a public statement on Tuesday to deny a rumor they had already asked the EU and IMF for a bailout. This shows how rampant speculation can feed upon itself that countries have to deny rumors to slow a run on their debt.

The euro currency is under attack as is the European Central Bank (ECB). The ECB was forced to retract its prior claim that it would no longer buy bonds issued by EU countries. This sent yields on their bonds soaring as the implied guarantee evaporated. The ECB was forced to eat those words and say they would buy bonds in order to stop the spike in yields. This is eroding the credibility of the ECB and it is clear that they will not be able to orchestrate continuing bailouts of other EU countries.

The fix Greece agreed to over the weekend may cure the disease but kill the patient. Greece had to agree to an additional $40 billion spending cut in order to qualify for the bailout. They are raising the value added tax to 23% and that is going to be a huge impact to the citizens who are already in revolt. The Greek finance minister predicted a recession of -4% for 2010 and -2.6% in 2011. I think those are very optimistic. Public sector workers and pensioners are going to see a 15% cut in pay. The retirement age for women will rise from 60 to 65. Citizens took to the streets in demonstrations and riots in protest of the austerity measures.

Greek Protests Over Austerity Requirements

There are growing calls for Greece to drop out of the EU and restructure its own debt for pennies on the dollar. The EU is pressuring Greece not to take this route because of the billions in Greek debt owned by other EU countries and banks. By bailing out Greece and forcing them to pay off their debt it is basically bailout out the rest of the EU with the emphasis on France and Germany, which hold the most Greek bonds.

This is the equivalent of the U.S. bailout out AIG and paying 100-cents on the dollar for the counter party loans to companies like Goldman Sachs. By having AIG repay $112 billion in counter party debts the U.S. prevented a collapse in the banking system. By forcing Greece to repay all €330 billion in debt it is an implied bailout of the EU banking system.

Did you know that you are bailing out Greece and the EU? The way the $144 billion bailout is structured today the IMF will put up 30% of the money. Since the IMF is 40% funded by U.S. taxpayers that means we are giving money to the IMF to give to Greece to payoff debts to European banks. Secondly this EU/IMF loan will be junior to the current bondholders. That means if Greece takes the money and then takes a hike the IMF loans will never be repaid. In a Greek bankruptcy, restructuring or devaluation the IMF debt will be the lowest tranche on the list. It will be the equivalent of being the very bottom tranche on a worthless CDO.

The weaker EU nations of Portugal, Ireland, Italy, Spain and Greece account for 35% of the GDP for the Eurozone. Each of these nations is about to undertake some serious austerity programs in order to get back below the EU debt limits. They won't be as drastic as Greece but they will likely push the individual economies back into a mild recession. This is going to be detrimental to the EU and to Europe in general. The European nations and banks including those not in the EU are currently holding $2.1 trillion in debt from those five countries. The odds of successfully avoiding a default are close to zero simply because there is no entity large enough to fund bailouts that large and those countries are in a debt spiral now that interest rates have nearly doubled.

Greece or actually the imploding Eurozone was just one of the many problems the markets faced today. Economic reports from China showed the economy slowing from its rapid pace of growth as it continues to raise reserve requirements. The volcano in Iceland shutdown airline travel in Ireland and slowed traffic in other countries. Australia raised rates again and passed a tax on natural resources like iron ore and coal. The Times Square bomber was arrested and he has ties to the subway bomber and Pakistan. Plus the oil slick in the gulf continued to make the news.

China's manufacturing activity as evidenced by the April PMI fell to 55.4 from 57.0. Since anything over 50 is still growth this was the 13th consecutive month of growth but that growth is slowing. Inflation in China rose for the tenth consecutive month. The Chinese government warned that inflation in the manufacturing sector was expected to "increase significantly" in the coming months. China also hiked the bank reserve requirement ratio by another half a percentage point in an effort to slow growth and the rise of inflation. China's Shanghai Composite Index fell -1.2% to a new 7-month low.

The Reserve Bank of Australia raised the benchmark rate for the sixth time in seven meetings. The bank raised rates to 4.5% saying the rapidly rising inflation had to be stopped. Home prices have risen 20% and local banks led by the Commonwealth Bank of Australia boosted mortgage rates to a quarter point to 7.51%.

Australia crushed the materials sector on Monday when it announced a 40% tax on profits generated by resource companies. Australia is a major coal and minerals producer. At any given time there are up to 50 ships waiting in line to be loaded for export of coal or ore to other countries. Peabody Energy (BTU) has lost more than -10% so far this week as has Rio Tinto (RTP).

Metals and commodities were crushed by the Australia tax, slowdown in China and the spiking dollar. Copper fell -3.5% today but is down -10.5% in the last six days. Silver fell -4.5% today alone. Gold spiked to almost 1,193 intraday before falling -27 to $1,166 but inflation concerns provided a small bounce at the close.

Chart of Copper

Chart of Gold

The spike in the dollar to new 52-week highs was instrumental to crushing oil prices. Add to that the potential for lower demand in China and it was a very bad day for crude with a -4% drop to just below $83. The news that BP was moving the first of three domed boxes to the leaking well helped calm the hysteria about the oil slick.

Oil prices also declined on expectations for another inventory build when the EIA reports on Wednesday morning. This was a minimal concern and the decline was mostly related to the sharp rise in the dollar. Hedge funds have been deeply involved in the carry trade where they short currencies and buy commodities and the +1% spike in the dollar had them dumping commodities to reverse the trade.

Oil had been in rally mode to trade over $87 on Monday on worries the gulf disaster would cause additional governmental regulation or restrictions on new drilling. Governor Schwarzengger backed away from a contentious proposal to allow drilling off the California coast. A senator from Florida has introduced a bill to raise liability limits on damages to $10 billion on oil spills. The legislative climate is not oil friendly today.

Crude Oil Chart

Chart of the Dollar Index

A Pakistani American, Faisal Shahzad, was arrested and taken off a plane to Dubai at JFK airport late Monday. Faisal has confessed to building and planting the truck bomb in Times Square. While the bomb was composed of fireworks, gasoline, propane and fertilizer and would have created more of a fireball than an explosion it was still dangerous. The bomber was found to have ties to the NYC subway bomber who was arrested in Colorado and had studied bomb making in Pakistan as part of a terror network. Obviously he flunked the course.

When investigators reported the attempted bombing was related to a terror network it became more than just a lone wolf type of an attempt as characterized by police over the weekend. This also weighed on the market to some extent on Tuesday. I have been surprised for several years that we have not seen an entire series of car bombs in the U.S. since they are so easy to construct and relatively easy to plant and trigger remotely. If Al Qaeda really wanted to cause some problems they could do it relatively easy in the U.S. and cause us great personal and economic grief.

Bomber Faisal Shahzad

Apple Inc (AAPL) lost -7.67 today or roughly -2.87%. Considering the market action I think that is relatively bullish. However, Apple is close to a major conflict with the Justice Dept over Flash. Apple will not let developers use applications with flash on the iPhone. Apple claims it is because Flash has some security flaws but almost everyone believes it is because of the long running Apple - Adobe feud. As a monopoly Apple can't disallow various things just because they want to. This battle has a long way to go but I expect it will heat up soon to the detriment of shareholders.

After the close today the FDA rejected the new drug from InterMune and the results are really ugly. The FDA requested a new clinical trial that could take years. As a result shares of ITMN fell more than 70% in afterhours. That s a drop from $45 to $11 and that could depress the Nasdaq at the open. However, ITMN is not a large component so hopefully the -$34 drop will have minimal impact.

InterMune Chart

The confluence of market concerns caused a monumental train wreck this morning. They say bull markets take the stairs up while bear markets take the elevator down. The drop this morning had multiple excuses but the result was the same. Initial support was broken and critical support was being tested.

For the last two weeks we have experienced some very high volatility with the Dow having a triple digit range on five of the last six days. This kind of volatility is normally associated with a market top. Of further concern is the volume imbalances. Monday's triple digit short covering rally was on relatively small volume of 8.5 billion shares. Today's decline traded 11.9 billion shares. That is a 40% increase in volume or an extra 3.4 billion shares over Monday.

Obviously a market drop of -285 points on the Dow and -87 points on the Nasdaq will trigger an awful lot of stops. Since we are entering the "sell in May" period I am sure those stops were tighter than normal. Still the volume in general has been a lot higher than normal over the last three weeks. Each of the new high attempts was met with a high volume sell off. The number of these triple digit moves and the number of high volume days is telling us the rally may be over. Note in the table below how the total volume increased after April 12th.

Internals Table

The Dow finally broke support at 11,000. That has been support since April 12th. The next critical level is 10,850 and that should hold on the first test. The highs since April 26th have been lower highs and today's dip under 10,900 was a lower low. This is a technical sell signal but there are still mitigating circumstances, which I will explain later.

I suspect this dip will be bought on Wednesday but I believe it will produce only another lower high and I don't think the gains will stick. The flush today was purely news related but that news included items that are longer lasting than just one day. The Greek bailout is still not done and the euro is not done going lower. That means the dollar will continue higher and commodities will move lower. This may not happen immediately but I think the fix is in and we are eventually going to break support.

Dow Chart

The S&P broke key support at 1180 and is testing CRITICAL support at 1165. That is support just under the 50-day average and a break of this level targets 1150 and then 1100. This chart is very clear. You have the rounded top, high volatility candles and serious decline to critical support. A breakdown here below 1165 is going to be lights out for the May market.

S&P-500 Chart

The Nasdaq dropped -87 points intraday. No, we have not gone back in time to the crash of the bursting of the tech bubble but it was a strong reminder that markets can move down very quickly. Tech stocks led by a -4.5% decline in the semiconductor index, had a very bad day. Because of the Intermune disaster tonight the Nasdaq is probably going to open negative on Wednesday. Apple has antitrust problems and could break support at $257 before the week is out.

The plunge below 2465 today was a clear break of support and the next target at 2400 will likely be tested soon.

Nasdaq Chart

The Russell sold off harder than the other indexes BUT it remains above both initial support at 700 and critical support at 675. I don't think the Russell is as bearish as the other indexes simply because it has held support. However, if 700 does break we could see a sudden shift in sentiment.

Russell 2000 Chart

In summary, I think we will see an attempt to buy Tuesday's dip. The bulls in the U.S. markets have not given up on the economic recovery concept. Earnings were very good and Q2 earnings are also expected to be good but stronger comparisons beginning in Q3 will make earnings a challenge unless top line sales pickup. That is not the problem today but will be the problem 3-4 months from now.

I believe a rebound will again fail at another lower high and that will be an additional signal that we are going to see lower lows ahead. I mentioned mitigating circumstances and one of those is the NonFarm Payrolls on Friday. This "should" be the best report in a couple years and many traders will be buying the dip in hopes of a blowout report. I am not that optimistic because I believe that number is already priced into the market. With Joe Biden running around claiming the number will be 250,000 new jobs or higher there are strong expectations already built into the market. With jobless claims holding in the 450,000 range it suggests that normal employment will be weak. I also expect jobless claims to spike from all the problems in the oil spill area. Tens of thousands of people are out of work from the closing of the fishing grounds and boats staying in port to avoid the oil.

I have been expecting the markets to weaken since the peak in the earnings cycle when Microsoft announced. The markets actually peaked two days after that announcement. I expect the weakness to continue but I am not expecting a washout. The EU problems will continue to haunt us as will the financial reform bill, oil spill, resource tax and the end of the earnings cycle. I suspect it will become increasingly harder for the bulls to recover from these triple digit declines.

Jim Brown