Signs of progress in Greece helped to push the indexes to new highs but those gains were very slim.
You probably heard multiple times today that Greece finally agreed to the terms of the second bailout of 130 billion euros. While that may be "technically" true it is still not a deal. The German finance minister was very quick to point out that there would be no second bailout until Greece actually implemented the terms of the first 110 billion euro bailout. Greece has failed to follow through on almost every single item it agreed to in order to get each successive tranche of the first bailout. You remember each of those crisis points as Greece teetered on the verge of default unless the quarterly payments of billions of euros was dispersed. Every quarter was a new crisis with new commitments to comply with the prior commitments.
That two years of procrastination and foot dragging is going to come back and haunt them now. The four AAA credits left in the eurozone, Germany, Finland, Netherlands and Luxembourg, are adamant that Greece fully comply with the prior agreements before they will sign off on any new agreement.
Greece still has to complete an agreement with private bond holders to take a 70% haircut before the EU will agree to the second bailout. Under the currently disclosed terms those investors would swap the 213 billion euros of debt for 30 billion in cash and 70 billion in long term debt with an interest rate of 3.5%. The present value of the deal equates to about a 70% loss of principal. Those bond holders are waiting until the EU approves the second bailout before they agree to the debt swap. Greece owes 14.5 billion euros due on March 20th to pay these creditors. If the second bailout is completed the 30 billion will be paid to these private creditors from the funds received in the second bailout. Obviously, no bailout, no debt swap.
Greece gets no respect from the EU commission because they lied multiple times about their fiscal problems. In Oct 2009 the newly elected government in Athens confessed they were broke and asked for help from the EU. They claimed they were running a budget deficit of 3.7%, above the 3.0% mandatory limit set for all EU countries. After the EU requested documentation of the budget deficit they admitted they were actually running a 12.5% deficit. This outraged the EU and they sent inspectors to examine the books because they could no longer trust what Greece had said. The inspectors found the deficit was actually higher at 15.4%.
The Greek government had used its borrowing power as an EU country to create a massive government workforce where jobs were created in order to get union support in elections over the last decade. The government workforce ballooned to more than 750,000 with 20% of the population working for the government. The jobs were guaranteed for life, they could not be fired and included fat pensions and health benefits. For the rest of the country unemployment has risen to 20.1%. The EU told them to cut 150,000 government workers and slash the minimum wage by 20%. As part of the "agreement" today they agreed to cut 15,000 workers by attrition and cut the minimum monthly wage from 750 euros to 586 euros. Since very few workers actually receive the minimum wage this is only a token concession. The average annual wage for a government employee is 75,000 euros.
The token agreement reported today is not likely to stand the test of the full EU vote. The EU has said they need to have a full agreement approved by Feb 15th in order to have funds available by the March 20th deadline. That means there are still six days left for this entire house of cards to collapse.
The market did not rally on the news of the agreement because it has been rallying on the rumor of an agreement for a month. The Nasdaq is up +12.6% for the year. The Russell 2000 +11.6%,S&P +7.6% and Dow +5.5%. The Dow is 100 points from 13,000 and investors have been digesting negative earnings like it was their last meal. The market has factored in the potential for Greece to agree to anything in order to get that big payday on March 20th. Today's gentleman's agreement is just the first step in another week or wrangling that could still end badly.
In the U.S. the economics continued to improve with the Jobless Claims declined by another 15,000 to 358,000. The prior week was revised higher by +6,000 to 373,000. Today's number was the second lowest reading since the recession. This continued trend lower is positive for sentiment because it shows the most current reading on job losses.
Weekly Jobless Claims Chart
On the negative side of the ledger the National Association of Realtors Metro Price Survey showed a -4.2% decline in home prices for Q4. The prior quarter posted a decline of -4.7%. This is a year over year comparison and should not come as a surprise to anyone reading this newsletter. Prices will continue to fall as long as there is an overhang of foreclosures. With mortgage rates at record lows there is going to be a strong wave of buying this spring.
Lastly the Wholesale Trade numbers for December increased much stronger than expected. Inventories rose +1.0% and sales +1.3%. Expectations for inventories was for a gain of only +0.4% after a zero reading the prior month. Durable sales rose +2.4% and nondurable +0.4%.
The economic calendar for Friday is slim with Consumer Sentiment the only report that might generate some market buzz.
In stock news Oracle (ORCL) announced it would be paying $1.9 billion for Taleo (TLEO), a recruitment software firm with products delivered as a cloud service. This follows a similar purchase by SAP of SuccessFactors, a human resources software company. In October Oracle agreed to buy RightNow Technologies for $1.43 billion. That company handles customer service over the cloud. The recent acquisitions should revise valuations for SalesForce.com (CRM) and NetSuite (N).
Alibaba said it was working with bankers to come up with a $3 billion loan to buy back part of the 40% stake held by Yahoo. That stake is thought to be worth up to $13 billion. There was also talk about taking Alibaba private. Yahoo announced earlier this week that Chairman Roy Bostock and three other directors will step down. Reuters reported several weeks ago that Blackstone Group and Bain Capital were preparing a bid for all of Yahoo for around $25 billion. That would be 20% more than its current market cap. Yahoo shares have been in a consolidation pattern since late October as sale and acquisition rumors persist.
Akamai (AKAM) rallied +14% after posting earnings of 45-cents compared to estimates of 40-cents. Revenue of $323.7 million also beat estimates of $311.7 million. Akamai exited the quarter with $849 million in cash after producing cash from operations of $136 million for the quarter.
Synacor (SYNC) announced it was slashing the price of its expected share price to $5-$6 per share, down from $10-$12 per share. The company is partly owned by Intel. Synacor will sell $5.45 million shares and existing shareholders, including Intel, will sell 1.36 million. That price cut does not bode well for the IPO. On Wednesday the agricultural biotech company Ceres Inc also cut the price range on its coming IPO.
After the bell Nuance (NUAN) reported earnings of 34 cents that missed estimates of 36 cents. Revenue of $360 million was well below estimates of $391 million. Nuance said relationships with mobile companies have become "more comprehensive and complex" lately resulting in delayed revenue and longer negotiation cycles. They also guided to earnings of 36-40 cents in the current quarter compared to estimates of 38 cents. Shares of NUAN declined to $27.70 and a -10% loss from the close.
Expedia (EXPE) reported earnings of 58-cents that beat the street estimates of 53-cents. However, revenue of $787.1 million was well below the $812 million estimate. Content costs jumped +29% and selling and administrative costs rose +19% to pressure profits. Shares of EXPE declined sharply in after hours.
Linkedin (LNKD) reported earnings of 6-cents compared to 3-cents in the year ago quarter. Adjusted earnings of 12-cents beat estimates of 7-cents. The company added 14 million members for the quarter and revenue more than doubled to $168 million. At year end there were 145 million profiles on Linkedin. Shares rallied more than $5 after the report.
Crude oil continued to move higher on the falling dollar and the potential resolution of the Greece crisis. The saber rattling in Iran plus problems in other Middle Eastern countries including Egypt, Syria and Nigeria sent Brent prices over $118.
Brent Oil Chart
U.S. WTI Crude Oil Chart
The market is inching higher but it is struggling. The S&P has sold off at the open every day this week but then rallied to close barely positive. To illustrate that point the S&P is up only +7 points for the week after four days of trading. That is not even a good day much less a decent week. Resistance at 1350 was broken at the close today but we still have a ways to go to break out to a new high. The high close in 2011 was 1363.61.
I am becoming increasingly worried the market is preparing for a bout of profit taking. However, as long as the dips are being bought and new highs being made we can't abandon the trend. We could easily see the S&P break through that final resistance barrier and race into the clouds. However, we could also see it stall here because of the major gains since December.
If we were to see a 2-3 day decline I am relatively sure there are millions of traders that would flood in from the sidelines and into the dip. Unfortunately I am still worried about the miniscule daily gains. There is a serious lack of conviction on the part of the buyers.
The Dow also scored another new high but with a gain of only +6 points. For an index that is closing in on 13,000 it has only gained +28 points for the entire week. That is an average of 7 points per day. That is far from bullish.
Support is 12,800 and I can't help but believe it will be tested soon. That would be market positive and represent only a drop of -91 points. Stronger support is well back at 12,600 and would be very healthy if that occurred.
The Nasdaq moved up to another new high at 2927 but it was a battle. The index started out in negative territory but recovered late in the morning thanks to gains in Apple. Apple shares rose by +16 to close at a new high at $493 after news broke they would have a new product announcement on March 3rd. This is rumored to be the iPad3 or the new Apple TV product.
Apple shares have risen +22% in 2012. Apple is 15% of the Nasdaq 100 and it has accounted for 25% of the Nasdaq 100 gains in 2012. If Apple stubs its toe the Nasdaq could crash. There are quite a few analysts that believe a touch of $500 is going to be an electric fence for the shares. We all know Apple is a great stock but no stock regardless of its history will rise forever. The Apple chart is a warning sign for the Nasdaq in general.
The Russell 2000 is weakening. This is our canary in the coal mine and it appears to be suggesting investors are no longer buying small caps. They are not yet taking profits in any volume but there is some limited selling. A break below the lows from the last two days (822) would be a technical sell signal. The gap open on the 3rd was to 820.84 making the target for a break under 820 a gap fill at 812 where it closed on the 2nd.
Russell 2000 Chart
We can't abandon the trend as long as the Nasdaq and Dow are making new highs but we can tighten up our stops for the day when the unexpected headline begins a decline. We could also see the market simply collapse under its own weight after more than 100 companies have posted earnings misses and even more have guided lower for the current quarter.
The Greek bailout deal was announced and there was no rocket ride higher. The obvious reason is that the market has already priced in a solution because Greece will say anything to get the money. The second obvious reason was the instant rejection of the agreement by Germany with a list of prior commitments Greece failed to honor. While most analysts expect Greece to eventually get the March 20th bailout there are plenty of tense days still ahead and anything can happen. Traders may be readying their exits.
I am becoming increasingly cautious about being long but we need to let the market tell us when to exit. Many people have gone broke trying to predict market tops. I suggest tightening stops and let the market trigger the exit.
Send Jim an email