The second Greek bailout has been approved after weeks of anticipation. Traders now need a new headline to trade.

Market Statistics

After a marathon EU ministers meeting on Monday the second Greek bailout for 130 billion euros has been approved. While that may appear to be the end of the story it is just one more chapter in this long running saga.

Despite all the news stories proclaiming a done deal it is far from done. Now the various parliaments in each country, including Germany, Finland and the Netherlands have to review the terms and approve it before money can be dispersed. When the money is finally released it will be done in tranches starting in March and running through 2014. In order to get the money Greece will have to implement more than 30 different savings and reform measures previously agreed to.

The majority of the first tranche will go to the private sector investors who are taking a 53.5% face value haircut on their debt. That equates to a -75% drop in the net present value of the debt. Some 30 billion euros will go to them as a "sweetener" to get them to accept the deal voluntarily. They will receive a small cash payment if they agree to swap their debt and cut the principal by 107 billion euros. They will tender their existing debt with an term of seven years and average interest rate of 4.8% for 30 year bonds with a face value of 46.5% of the original principal and a rate of 3.65%.

Another 35 billion euros will go towards buying back some bonds and 23 billion will go towards recapitalizing Greek banks. Almost none of the money will go towards helping restart the Greek economy.

The eurozone countries also agreed to cut the interest rate on the first 110 billion euro bailout from an average of 2.5% to a new rate of 1.5%. The ECB and several other central banks also agreed to give up their profits on existing Greek debt they now hold. Those profits will be paid into the fund to repay all the eurozone countries for the bailout.

Greece had to agree to allow the majority of the money to be deposited into an escrow account that will be used to make future debt payments and can't be used to pay things like salaries for government workers or medical expenses. The bailout is to be used to pay down debt, not for general operating expenses. This avoids the problem of a debt default in the near future. Greece also had to agree to have the troika install a permanent watchdog group in Athens to make sure the money is not being spent incorrectly and to insure the agreed reforms are actually implemented.

The next challenge is the private sector debt swap. The swap is expected to commence on March 8th and run for three days. Nobody knows how many investors are going to balk at the debt swap. Those that do balk and refuse to tender their existing debt will be forced to comply by the passage of new rules. Those with credit default swaps are not expected to willingly agree to the swap, which would render their CDS insurance worthless. They are the ones expected to balk. It is unknown who is holding CDS and in what amount. One estimate is that only 3.7 billion euros of the 207 million in private debt is backed by CDS.

Greece may have won initial approval of the 130 billion euro bailout but it is just one more step in a very long process. Undoubtedly there will be major potholes in the road ahead but for the next couple weeks there should be a lot fewer headlines on the crisis.

The markets rallied at the open but the spike was brief. Almost immediately the markets sold off but traders bought the dip once again. The markets rallied again around 10:30 and held right at 13,000 on the Dow until 1:30 and sellers hit the tape again to push the Dow to session lows. Buyers of blue chips appeared once again and pushed the Dow, S&P and Nasdaq 100 back to positive territory but only barely. Small caps and mid caps closed sharply negative and that suggests the excitement over the Greek announcement was already priced in and is no longer a reason to rally.

The U.S. economic calendar only had one economic report of note. The Chicago Fed National Activity Index (CFNAI) came in at 0.22 for January compared to 0.17 in December. However, the December number was revised higher to 0.54 so January was actually a minor decline. These numbers are revised monthly so January could also be revised higher next month.

Three of the four major categories posted gains as they did in December as well. The employment component rose from 0.28 to 0.35. The overall trend is positive although the chart is very choppy. The revised December reading was the highest since late 2006 so despite the volatility the trend is on the verge of a breakout.


The economic calendar for the rest of the week is busy with the Kansas Fed Manufacturing Survey and the Apple shareholder meeting the two biggest events. Existing home sales for January are expected to increase but there is a chance the news could disappoint. Weather was warmer but January is not normally a big home sales month.

Economic Calendar

Ten percent of the Dow reported earnings today. Ok, it was only three stocks but 10% sounds like a bigger number. The 800 pound retail gorilla posted an increase in sales but missed estimates. Wal-Mart ($WMT) slashed prices as promised in Q4 to bring back shoppers and the strategy worked. Same store sales rose +1.5% and the first gain after nine consecutive quarterly declines. Wal-Mart posted earnings of $1.44 and right in the middle of its guidance but analysts were expecting $1.45. They guided for Q1 for earnings in the range of $1.01 to $1.06 and analysts were looking for $1.05. Shares of WMT declined -4% on the news and knocked about -19 points off the Dow.

WMT Chart

Home Depot ($HD) rallied after posting earnings of 50-cents compared to estimates of 42-cents. Revenue of $16.1 billion was higher than estimates of $15.5 billion. Home Depot said a warmer winter led customers to tackle outdoor projects and the rise in housing starts to three year highs in November helped to fuel contractor buying. Same store sales rose +5.7% overall and +6.1% in the USA. The company guided analysts to full year 2012 earnings of $2.79 per share compared to prior estimates of $2.76. Revenue is expected to rise +4% to $72.47 billion for the full year. HD operates 2,252 stores. Rival Lowe's will report earnings on Monday. HD shares spiked to $48.07 on the earnings but declined to close only slightly positive at $46.96 as the Dow gave back its intraday gains.

Home Depot Chart

Kraft ($KFT) reported earnings of 57-cents that were in-line with estimates but that was a strong +23.9% improvement from the comparison quarter. Kraft projected a +9% increase in earnings for 2012. Revenue rose +6.6% to $14.7 billion. Operating margin was 11.6%.

Kraft announced it was splitting into two companies with the North American grocery business retaining the Kraft name while a global snack food business will be named next month. Groceries generated about $18 billion in sales last year while the snack food business accounted for $35 billion.

Kraft Chart

After the bell Dell posted earnings that fell -18% to 51-cents to fall below the analyst estimates of 52-cents. CFO Brian Gladden said profits were hurt by a combination of weakness in U.S. public spending, discounting of leftover smartphone inventories and the impact of the Thailand flood on the product mix. He said as a result of the flood they could not get the drives they wanted and had to sell less configured lower-end systems that depressed their margins. He also said the disk drive issues are continuing in Q1. The CFO said Q1 sales would likely be down -7% as a result of those continuing conditions. Dell shares declined -$1 after the report.

Dell Chart

S&P earnings for Q4 including Apple with 424 companies reported are up +4.02% over 2010-Q4. That is the lowest earnings increase since the recession. If you subtract Apple earnings are actually down -2.7%. There were 109 companies missing estimates or 25.7% and 43 reporting in line for 10.1%. More than 64% or 272 companies beat estimates for actual earnings. However, 64% of those reported have lowered future guidance.

Crude oil prices rallied to $106 intraday on worries over Iran and problems in other Middle Eastern and Northern Africa (MENA) countries. Iran announced over the weekend they were halting oil deliveries to France and the UK and may soon halt deliveries to other EU countries. This was simply a headline grab since France and the UK had already halted Iranian purchases.

Iran is very good at creating headlines that will push oil prices higher and increase their income. They have been doing it for years whenever oil sales weaken. However, this time they have a valid reason and we will see them announce further halts. The EU accounted for about 18% of Iranian oil exports last year. With the EU announcing its own oil embargo early this year each country has been frantically searching for other sources. As each country secures a new source and cancels future Iranian purchases we will get more bluster filled headlines from Iran.

Western nations hoped a two day visit by IAEA inspectors was going to help defuse some of the hostility over the nuclear problem. However, when inspectors showed up this week they were denied access to the Parchin military complex outside Tehran where they believe weapons research is being conducted. This will only escalate tensions and increase fears over a possible attack by Israel.

To make matters even worse a top Iranian general, Mohammed Hejazi, warned today that Iran will make preemptive military strikes on any nation leaders believe might attack Iran. "We will not wait for enemies to take action against us. We will use all our means to protect our national interests." He made these statements as Iran conducted air defense war games in order to prepare for an attack against their nuclear facilities.

The denial of the site visit and the warning of preemptive strikes served to ratchet up worries that Israel could attack Iran at any time. The window for an attack is the next six to eight weeks before the weather turns into a negative factor.

The bluster out of Iran along with the Greek bailout approval helped to push oil prices to new nine month highs. WTI rose to $106 intraday and Brent to $121.50. The March WTI contract expired at the close after dipping slightly to $105.50 but the April contract is holding steady at $106.

WTI Chart

Brent Chart

Another decline in the dollar plus the increased tensions over Iran helped to push gold and silver to new highs for the month. Gold prices rose to $1760 for a gain of +35 and it is very close to breaking above three month resistance at $1765. That could start a new run at the old highs.

Silver gained +1.13 to $34.35 and faces a solid resistance test at $35. A breakout there would create a buying frenzy that could quickly retest the $40-$43 level from last summer. Numerous noted silver analysts are calling for new highs in silver before year end. The amount of public interest in silver is escalating by the day. The Denver paper had a front page article about Silver Eagle over the weekend. The volume of purchases of silver and gold eagles from the mint are at record highs. If you don't have a plan to add physical silver to your portfolio soon I suggest you make one quickly. Here is a link to a report I wrote in December about the coming rally in silver. Silver Report

Gold Chart

Silver Chart

The announcement of a bailout deal on Greece plus the touch of Dow 13,000 in the U.S. caused yields to rise slightly on U.S. debt. The moves today were immaterial but the pattern is the key. As equities rise to multi-year highs those in fixed income investments are going to start to dump those low yielding holdings in favor of equities.

Cash is trash and fixed income is heading in that direction. The yield on the 30-year bond is very close to a breakout to four month highs despite the Fed's buying on the higher end of the curve. If the U.S. economy continues to improve and equities do move over Dow 13,000, S&P 1365 we could see some serious flight from fixed income. Money managers who have been parking customer money in 1% to 2% yielding funds are going to be under a lot of pressure to switch game plans in favor of equities.

There are a lot of profits at risk in the fixed income market thanks to the rally in bonds over the last year. Those profits will start to bleed away quickly if other investors begin to switch to equities. Nothing will cause a bear market in bonds faster than disappearing profits. Leverage is a wonderful thing when it is working for you but once it turns against you the damage can quickly be severe.

30-Year Bond Rate

Ten Year Note Yields

The S&P closed at 1362.21 after trading as high as 1367. The high close in April was 1363.61. The pending breakout by the S&P is really attracting attention and that could be the starters gun that propels this rally to the next level.

I have reported numerous times the current rally has no conviction but the indexes continue to add to gains by a handful or points nearly every day. The closer the Dow gets to 13,000 and S&P to 1363 the shallower the dips become. Volume has started to increase but it was slightly negative today with decliners beating advancers. Volume was 6.6 billion shares. Not strong but better than the five billion shares days we early saw last week.

Nearly every professional trader and analyst continues to call for a bout of profit taking. I am in that crowd. However, as we all know the market can remain irrational far longer than we can remain liquid. Nothing prevents the markets from breaking out and starting a new leg higher. All it takes is a change in sentiment by those fixed income investors. They are the missing link that could over power the worries over profit taking.

Support on the S&P is well below at 1340 and every day the S&P adds to gains the potential breakout becomes more likely.

S&P Chart

A four year chart shows the long term break of a monster triangle and that is driving buyers to throw caution to the wind. A real breakout over that 1363 level with decent volume is going to catch fire.

S&P Chart - Weekly

The Dow traded over 13,000 for the first time since May 20th 2008 but it could not hold the gains. Wal-Mart had a lot to do with slowing the gains but that was not the problem. The first touch of a major milestone, even though it is not really a resistance level, is normally met with selling. Traders target those high profile levels for selling and buyers have to regroup and take another run at that level, sometimes over a long period until the sellers give up.

The Dow is already in breakout mode despite the failure to close over 13,000. When it broke over resistance at 12,900 last week it was a decisive event. If it can move over 13,000 this week with a decent gain then that number loses its psychological impact. Support is well back at 12,800.

Dow Chart

The Nasdaq was handicapped by some major losses in BIDU -6, NFLX -6, CME -4, SINA -4, etc. Offsetting those losers was a strong gain by Apple of +13 to $515. Google also helped with a gain of +9 to $614. The Nasdaq has more than 2,500 stocks and decliners were nearly double the advancers. Tech stocks have had a great run at +25% since the Q4 dip and apparently some traders were using the Greek headline and the touch of Dow 13,000 as a reason to take profits. The Nasdaq did close at 2948 and well off its 2934 lows for the day. Dip buyers were alive and well but just not enough to push it back to positive territory.

The next major psychological level for the Nasdaq is 3,000. The last time the Nasdaq saw that level was November 2000 and it closed today only 52 points lower. The Nasdaq is at 11-year highs after a +25% rally. There is ample reason for profit taking but no dip has stuck for more than one day since Jan-26th. Losing -3 points today was nothing but noise.

Nasdaq Chart

The Russell 2000 is telegraphing increased concerns with a -5 point loss. The three month uptrend support is in danger if being broken on any further declines. Fund managers are favoring the liquid large caps as we do battle at the market highs.

This decline in the Russell came in only a 90 min period starting exactly at 1:PM in what was definitely a sell program. That is somewhat of a consolation prize because the selling was not broad based but simply one firm lightening up. As long as that does not continue later this week fund manager sentiment should not be damaged.

Russell 2000 Chart - Daily

Russell 2000 Chart - 30 Min

The Doe Transports failed to confirm the Dow gains again but this was a reaction to rising oil prices rather than a sudden urge to sell transport stocks. There was a clear reason since high oil prices mean lower profits for the sector. The airlines were the primary reason for the decline.

Dow Transport Chart - Daily

The market is going to continue to chop around at the highs until a headline appears to provide a direction. The Greece headline has been priced in for a couple weeks now and that made it a sell the news event. The price of oil probably had a bigger impact on equities than Greece. With Brent moving over $120 and WTI over $106 we know the price of gasoline can't be far behind. It is already at a record high for this time of year.

We know high gasoline prices will depress retail sales and there is a clear danger of fuel prices pushing the U.S. back into an economic malaise. The economy is not that strong at this point where $4 gasoline can't damage sentiment. With estimates for prices as high as $5 this summer we may be seeing the leading edges of concern. Because I am always focused on oil prices I may be reading too much into today's gains and its impact on the market. However, I know prices will be am impact longer term as they continue to rise.

I would continue to buy the dips and keep your fingers crossed for oil prices to ease on Wednesday and allow investors to breathe easier and focus on Dow 13,000 and S&P 1363.

Jim Brown

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