Greece is the number one headline for next week as the three-year crisis moves into another stage.

Market Statistics

I can't count the number of times Greece has been the focal point for the next day/week of trading. It is amazing because Greece only has an annual GDP of $303 billion or 0.4% of the global GDP of $69.7 trillion. According to the IMF it ranks 35th in the world. This tiny country has turned the economic and investing sectors upside down for nearly three years with its weekly chapter of woe.

Greece announced last week it's GDP shrank by -6.5% in Q1. That was compared to the prior revision at -6.2% and the Q4 GDP of -7.5%. Consumer spending fell -7.5% and capital investment -21.3%. Unemployment is 21.9% overall and 51% for those under 25.

Spain, 12th largest global economy at $1.5 trillion and fourth in the euro zone may have stolen the headlines last week and probably the headlines on Monday but then it is back to Greece for the new elections next Friday. If the anti-austerity party wins in Greece the odds are good the country will default and leave the euro zone. If the pro-austerity party wins and is able to form a coalition government they will probably default at some point in the future but not leave the euro.

It is the threat of leaving the euro that has turned Europe upside down. I am not going to repeat all the points here because I have covered those dozens of times in the past. For the U.S. a win by the pro austerity party is preferable. The election on Friday will be the topic all week once we get past the Spanish headlines on Monday.

Spain was expected to ask the euro zone this weekend for help with recapitalizing its banks. They will be the fourth country to officially ask for a bailout since the crisis began. Deputy finance ministers from the euro zone were expected to hold a conference call on Saturday to discuss a Spanish request for aid. No figure had been set. Later the 17 finance ministers from the euro zone will hold a separate call to discuss approving the request. The EU spokesman said Spain had not yet made a formal request but the euro zone was preparing for the eventuality.

The situation in Spain is deteriorating quickly. On Thursday Fitch Ratings cut their sovereign credit by three notches to BBB because of the country's exposure to bad loans from a collapsed real estate sector. Unemployment is 24.4% and rising.

The euro zone ministers realize an agreement on Spain needs to be reached immediately before the Greek elections. If the wrong party wins in Greece the euro zone could be thrown into a panic that could last for months. Spain needs resolution immediately.

The estimates for the size of the bailout needed range from 40 to 150 billion euros. (Fitch estimates 100 billion euros, S&P 80-112 B, JPM 150 B) The actual amount will be based on an audit in progress by two independent assessors. The first group will report their findings on June 21st and the second on July 31st. The bailout will likely come from the 440 billion euro European Financial Stability Facility or EFSF. Malcolm Barr, a JPM analyst, said a "bank rescue would only be a stepping stone for a broader package of support for Spain" because it would underscore the inability of the government to raise money.

Update: Late, late Friday night Spain said it may not ask for a bank bailout because Germany may impose conditions on the deal. Also, Moody's warned it was about to cut Spain's debt to BBB, following the same action in prior weeks by Egan Jones, S&P and Fitch. If Moody's does cut Spain as expected to BBB it will result in a 5% increase in repos on Spanish bonds. What this means is that banks that have pledged Spanish bonds as collateral for ECB loans will have to put up another 5% to further collateralize that debt. In other words the collateral will have gone down in value so the banks will have to put up additional collateral. These are the same banks currently in need of a bailout.

You may have heard that Spain successfully sold 2.1 billion euros of debt on Thursday. What you probably did not hear was that the major buyers were the Spanish banks currently in need of a bailout. Apparently Spain unloaded that two billion into the banks knowing full well they were going to ask for a bailout for those same banks on Saturday. That is an interesting financing tactic. That is like knowing you are not going to be able to make a payment on your credit card and going out on the day before its due and charging it up to the limit before your credit privileges are suspended.

Spain will join Greece, Ireland and Portugal in receiving financial aid from the EU. Cyprus is expected to be the next country to request aid. Cyprus will have to seek a bailout of its banking system after taking a huge loss on its Greek debt. Banks were forced to take a 76% write down on their investments when Greece forced a default on their bonds. The second largest bank, Cyprus Popular Bank, posted a $3.2 billion loss on its Greek debt. Cyprus is forced to ask the EU for help because it is unable to borrow from the international markets after two ratings agencies cut its rating to junk.

The decline in economic activity in Europe because of the debt crisis has spread to every nook, cranny and burger joint. McDonalds (MCD) reported lower than expected same store sales for May and warned that austerity in Europe was taking a toll on sales. Same store sales rose only +2.9% in Europe but analysts were expecting +4.7%.

McDonalds also said its sales in Asia, the Middle East and Africa declined -1.7% in May with particular weakness in Japan and China. Sales in China declined for the first time since November 2009. The company actually said this was not just a bad month but the start of a new trend. Dow component MCD shares declined -5% on the news making it the biggest drag on the Dow.

In U.S. economic news the trade deficit for April narrowed to $50.1 billion from $52.6 billion. The pace of imports declined -1.8% while exports declined -0.8%. The recession in Europe and slowdown in China are being felt in the U.S. and the internals in this report are going to be a drag on Q2 GDP when the next revision is reported.

Wholesale inventories rose by +0.6% in April compared to +0.3% in March. Rising wholesale inventories point to slower demand.

The two reports were for the April period and presented lagging data. They were both ignored by investors.

Goldman cut GDP estimates for Q2 to 1.8% primarily due to weaker than expected real export growth as a result of weakness in Europe. Deutsche Bank (DB) cut GDP estimates from 2.9% to 2.4% because of "unexpected weakness in recent federal government spending, which has been primarily due to significantly lower military outlays." Barclays cut their estimates to 2.0% for Q2.

The economic calendar for next week is actually highlighted by news out of China rather than U.S. economics. China has a tsunami of economic numbers being reported this weekend. Normally they would be watched only by the currency traders and the economic geeks responsible for reporting Asian news.

However, China unexpectedly cut interest rates on Thursday for the first time in nearly four years. It also cut prices for gasoline and diesel. The sudden rate cut only two days before the May economic data suggests the numbers could be ugly. Wholesale prices declined -1.4% and the second monthly decline suggesting consumer demand is crashing. Food prices fell unexpectedly with annualized gains of +6.4% compared to +7.0% in the prior month.

If China's economic numbers are worse than expected we could see an ugly market on Monday. China is the thermometer we use to determine the health of the global economy since they make the majority of consumer goods used around the world. If activity slowed dramatically analysts will be proclaiming a global recession on Monday.

Update: Late Friday night the WSJ reported a May CPI number for China at 3.0% compared to consensus of 3.2% and April at 3.4%. The PPI declined -1.4% compared to estimates of -1.1%. On Saturday China reported Industrial Production rose +9.6%. That was higher than the +9.3% in April but lower than estimates at +9.9%. They also reported Retail Sales rose a smaller than expected +13.8% compared to forecasts of +14.3%, April's +14.0% and +15.2% in March. Demand is definitely weakening.

Next week the reports out of the U.S. that are most important are the PPI and CPI but the recent trend has been a slowing of inflation so those headlines will also be ignored as long as they are in the range analysts expect. A sharper drop than expected would revive the deflation fears but we have a long way to go before that could be a problem. PPI is expected to decline -0.6% and CPI -0.2%.

Economic Calendar

Other overseas events include the OPEC meeting on Thursday. Several countries have already called for production cuts including Venezuela, Iran, Iraq and Algeria. This comes as OPEC production rose to 31.75 mbpd in May and 1.75 mbpd more than the official production quotas. The European recession and its impact on China and the U.S. has slowed demand while production is the highest it has been since 2008.

Saudi Arabia has already given notice it will continue pumping at a high rate in order to keep prices low ahead of the Iranian oil embargo scheduled to begin on July 1st. For Saudi Arabia this is a bloodless war against Iran. Keeping the price down and more importantly keeping the world supplied with oil during the embargo keeps the pressure on Iran to give up its nuclear ambitions and also force it to quit spreading civil unrest throughout the Middle East. If Iran has limited oil income it can't ship money off to fund protestors and terrorists in other countries.

However, there is a downside to this program. Saudi needs $98 oil (Brent) to fund its budget and the social programs that are keeping the Arab spring at bay in Saudi Arabia. At some point Saudi will have to decide between supporting prices or pressuring Iran. Iran needs oil prices at $85 to support its budget but that assumes full production and full sales. If their 2.6 mbpd of oil sales is cut back to 1.6 mbpd as expected that is a sizeable hit to revenue.

Saudi wants to keep the world markets well supplied because the EU embargo and U.S. sanctions both have escape clauses if prices were to rise too high as a result. Saudi has built up 80 million barrels of oil in storage around the world to keep any short term challenge in the Persian Gulf from impacting prices. Barton Biggs claims this economic war by Saudi Arabia has been in the in the master plan of the Saudi royal family for sometime while they waited for the correct time to implement it. Destroying the destabilizing Iranian influence in the Persian Gulf by reducing their oil income is a dream come true for Saudi Arabia.

The OPEC meeting is on Thursday and you can expect some heated tempers and I seriously doubt there will be any consensus opinion on cutting production since Saudi Arabia carries the equivalent of a veto.

The UAE is rushing to complete a 236-mile pipeline to the Indian Ocean that would allow them to export their production without shipping it through the Strait of Hormuz. The 48-inch pipeline has been completed and is in the testing phase. It has a capacity of 1.5 mbpd. Emirati officials have not announced a starting date but suggested it could be soon. The seven state federation is OPEC's third largest exporter of oil behind Saudi Arabia and Iran. Iran has repeatedly threatened to close the Strait of Hormuz where one third of the world's oil is shipped daily if Iran is attacked or their oil sales are cut off.

Crude oil prices are hovering right at support ahead of the OPEC meeting and Chinese economic reports. Oil posted a gain for the week to end a streak of five weekly losses.

WTI Crude Chart

Brent Crude Chart

The next event is the Iranian six nation meeting in Moscow on the 18th. The Iranian president has already said the meetings would fail because the demands on Iran are unreasonable. Those demands are for a halt in uranium enrichment and access to the Parchin military base where nuclear weapons research is thought to have been carried out. This is the last meeting before the embargo and sanctions are scheduled to begin so we will see how committed Iran is in keeping a rigid nuclear posture.

The Fed's FOMC meeting begins on the 19th and they are widely expected to make some sort of adjustment to their policy. This could be as small as extending Operation Twist or tweaking some other program. They are not expected to announce any QE programs. Bernanke said in his testimony on Thursday that the Fed stood ready to change the policy to increase stimulus if needed. Three other Fed heads indicated they were acceptable to further stimulus in their speeches last week. It is definitely a mixed crowd so hopes for additional stimulus are neutral.

Lastly, the Supreme Court could announce the decision on the Affordable Care Act as soon as Monday. They don't announce their dates in advance and all we know is it will be in June. There are rumors there will be an announcement on Monday with decisions on pending cases. The healthcare sector is going to be extremely volatile regardless of what decision the court makes. One analyst said hospitals could gain 50% if the law is invalidated. The president said he would press to pass changes to the law if it was struck down. Odds on getting a new law passed are basically zero before the election.

The FDIC closed down four small banks this weekend at a cost of $80.8 million. They were the Farmers and Traders State Bank in Illinois, Waccamaw Bank in North Carolina, Carolina Federal Savings in Charleston SC and First Capital Bank in Kingfisher OK. Waccamaw was the largest with 16 branches. Bank failures are down dramatically from the financial crisis levels. In 2009 there were 140 banks closed and 2010 saw 157 closed. In 2011 that dropped to 92 and after this weekend there have only been 28 in 2012.

In stock news Apple is set to hold its developer conference next week and release the new version of iOS 6. They are also expected to announce some new versions of the MacBook Air and MacBook Pro powered by Intel. A flood of new videos on YouTube purport to show the next version of the iPhone that is expected to be released late in Q3. The videos show a larger screen and an aluminum back. The volume of the leaked videos and the consistency of the various features being discussed suggests they could have some authenticity. Apple aficionados will have to wait for Sept/Oct for the official announcement. Apple shares are threatening to break over resistance at $580 and head back to two month highs at $600 if successful.

Apple Chart

Texas Instruments (TXN) will hold its mid-quarter update conference call on Monday after the close. This update can be market moving depending on the content. TXN will discuss market trends and its outlook for the future. The fate of the semiconductor sector will be reliant on this conference call. TXN shares need some positive news after declining for two months.

Texas Instruments Chart

The outlook for the Nasdaq (NDAQ) continues to dim. CNBC broke a story on Friday claiming UBS was preparing to sue the Nasdaq for $350 million for losses sustained in the Facebook IPO. Reportedly UBS tried to buy millions of shares of Facebook but could not get trade confirmations until the stock sank well below the IPO price. UBS then found itself stuck with millions of shares at the IPO price that they eventually sold under $30 per share. They claim the stock should have been halted when it became apparent there was a problem in the system. In a statement a UBS official suggested there could be many more firms like themselves that took huge trading losses because of the lack of timely execution confirmations. UBS was not an underwriter for the IPO.

Nasdaq has admitted there were delays and has raised its initial compensation fund from $13 million to $40 million. Up until Friday there was thought to be somewhere around $100-$150 million in losses by banks and brokers in the IPO process. The claim by UBS suggests there could be well over $500 million in losses if not more.

Nasdaq Chart

There was some bright news for Nasdaq on Friday. Even in the midst of the Facebook disaster there are still wins for the Nasdaq. NYSE listed Kraft (KFT) announced it was moving its listing to the Nasdaq on June 26th. The ticker will remain the same until the company splits into two companies later this year. Those surviving companies will also trade on the Nasdaq with the symbols KRFT (Kraft Foods Group) and MDLZ (Mondelez International). Kraft said they saved several hundred thousand dollars in listing fees.

Navistar (NAV) lost -$8 on Thursday after the truck company reported a Q2 loss of -$1.99 per share. Analysts were looking for a profit of 67 cents. The company lowered its full year forecast to a range of zero to $2 per share. In February they had predicted a profit of as much as $5.75 per share. They reduced that to $5.25 in March. Going from $5.75 to $0.00-$2.00 is a major revision. Navistar said it was having a tough time meeting tougher emission standards for one of its trucks. Shares of Navistar declined from $28.13 to $20.21 before rebounding sharply over the last two days to $28.36. The reason for the rebound was news from Carl Icahn that he raised his stake from 10.6% to 11.9% on the drop. He purchased an additional 883,200 shares at an average price of $24.44. This is one time where investors should be really glad Icahn was onboard. However, given the magnitude of the profit decline I would be using the $8 rebound to exit my position.

Navistar Chart

The gains last week came in two spurts. Monday was flat with a -12 point opening dip that was erased by the close for no gain. The total S&P gain from Tuesday's open through Friday's close was +45 points. That just happens to be the points gained in the two short squeezes. One occurred at Wednesday's open and another at Wednesday's close that carried over into the Thursday open. Those squeezes accounted for 45 points and the entire gain for the week.

This was not excited buying where investors said "stocks are cheap, I am going to load up today." It was simply a massive short squeeze after the worst week since November. The squeezes powered last week to the best weekly gain of the year.

This is extremely typical. You get a big oversold push to new lows after several weeks of declines and then a sharp rebound as those pressures are relieved. If the indexes had rebounded past resistance I would be more optimistic. Unfortunately the rebound stopped right at or below strong resistance in all cases.

Some analysts will have you believe the market was climbing a wall of worry. I believe it was a wall of short covering ahead of some high visibility events. Traders did not want to risk existing profits when European leaders were telegraphing a possible bailout of Spanish banks all week. The ECB meeting, Bernanke testimony, etc were potential events that could have wrecked profitable short positions. Bearish traders did the right thing and took profits and that pushed prices higher.

Other traders probably bought the optimism of a potential bank rescue, potential stimulus programs, etc and went along for the ride. The markets are rarely neutral. They are either overbought or oversold or in the process of getting to those levels. The rally last week relieved the oversold conditions and left the markets at that rare neutral position ahead of the weekend events. Bulls did not want to be long ahead of the China news and bears did not want to be short ahead of a potential Spanish bank bailout. Opposing forces met at resistance and called it a day.

S&P resistance is now 1325-1334 and we closed at 1325. This is the ideal location for a good news breakout and also ideal for shorts to jump back into the game if the weekend news was bad. The economic news from China over the weekend has been worse than expected. In theory this should mean a lower open on Monday but you have to wonder if having the 48 hours to mull it over if investors will actually be relieved it was not worse. I think the key point is that all the data points were declining and some have been declining for six months or more. You could say those who take an optimistic view of China are just rearranging the deck chairs while the ship sinks.

China is taking action to stimulate the economy with its rate cut last week and the relaxing of policy on loan growth. Unfortunately as we know from experience it takes months and multiple policy announcements to change economic direction.

I can't forecast the open on Monday. As of 5:PM on Saturday Spain has not yet asked for the bank bailout and they may wait until after the June 21st audit release. Estimates from all over Europe seem to be trying to top each other on how much a bailout will cost with multiple headlines at 100 billion euros and higher. Apparently Spain does not want to mention a number until the audit is complete. They could say 80 billion today and the audit says 125 billion on the 21st. That would put them in a more embarrassing position than they are today.

Update late Saturday night: The euro zone has agreed to loan Spain 100 billion euros to bailout the banks. The money will be put into a special fund Spain created specifically for the banks and not go into the general fund. The actual amount will include a "significant" safety margin but won't be decided until after the June 21st audit release. The finance ministers did not say where the money was coming from or how it will be paid. Reportedly the 2.5 hour conference call became heated several times before the agreement was reached. This should have a positive impact on the markets on Monday.

We just need to watch the 1225-1234 resistance range and go with the flow. If we move over that level for more than a few minutes then additional shorts will be forced to cover and that will push us into a new formation on the charts. If that resistance holds and we open lower then we could go into a holding pattern while we wait for Greece.

We remain hostage to the headlines and there is not much we can do. On the U.S. side the earnings outlook for Q2 is slowly declining. Warnings like McDonalds on Friday should cause investors to start planning for a weak earnings cycle. That could also depress markets in the weeks ahead.

S&P Chart - 25 Min

S&P Chart - 90 Min

S&P Chart - Daily

The Dow rebounded to resistance at 12,550-12,600 and that is where is closed. There was a +93 point gain on Friday but the close was still lower than the Thursday high thanks to the market drop on Thursday afternoon. You can't look at the closing headlines and make market decisions. You have to look at the bigger picture. For the Dow that was a close below the 12,600 resistance level. A breakout over that level would take us to a four week high so it needs to be watched carefully.

Dow Chart - 90 Min

Dow Chart - Daily

The Dow transports have not confirmed the rebound in the Dow industrials. The rebound to resistance at 7620-7630 should have been stronger given the persistent decline in the price of oil. The weakness in the economic outlook is weighing on the transports in the form of lower volume estimates.

Dow Transports Chart - Daily

The Nasdaq was boosted by the return of fan favorites to the top 20 list. Apple, Google, Priceline, etc posted gains with Apple moving back to strong resistance and on the verge of a breakout.

The Nasdaq closed at initial resistance at 2858 but well below Thursday's high at 2873. Tech stocks had a really good day on Wednesday but have been unable to move significantly above Wednesday's close at 2844. Sellers were waiting on Thursday's gap open.

I am encouraged by the Apple chart and their developer's conference next week. This normally provides a lift for the stock and any material gain in Apple at this point could trigger a sharp move higher and drag the Nasdaq along for the ride.

Nasdaq Winners

Nasdaq Chart - 90 Min

Nasdaq Chart - Daily

This weekend has seen a flood of headlines from Europe and Asia. I barely got five paragraphs written before the headlines changed. In the "you can't make this stuff up" category there was another revelation late Saturday that could dramatically power the markets on Monday. German news magazine Der Spiegel reported late Saturday that EU leaders are working on a comprehensive plan to rescue the euro that would include the issuance of joint euro bonds. This is a move that Germany has repeatedly rejected.

Reportedly European Union Commission President Jose Manuel Barroso, European Council President Herman Van Rompuy, Euro group head Jean-Claude Juncker and European Central Bank President Mario Draghi are working on plans for a "genuine fiscal union" in which individual member states would no longer be able to independently take on new borrowing. Governments would only be able to decide how to spend the money they raised in revenue. Any country that needed any additional funds would be required to ask the euro finance ministers. The ministers would then decide which financial needs at which level were justified and would then issue joint euro bonds to finance those needs.

This means collective liability for those debts. This is something Germany is strongly against but the plans being made at such a high level suggests Germany is ready to either give in to the greater good OR leave the euro in some fashion. There have been suggestions that Germany reissue its currency and basically have a dual currency system. Germany could have its strong mark but still utilize the euro. This would allow Germany to give up spending control to the other 16 nations. I think this is crazy because without Germany in the euro it would devalue dramatically. However, that would benefit the 16 remaining nations because their exports would be cheaper and trade would increase.

My brain is spinning with all the implications from the news this weekend and the only thing I can recommend for Monday is to watch the charts and go with the flow. A breakout here could have legs. That is especially true if the euro zone is going to implement real change rather than just plan to make a new plan. While I doubt such a genuine fiscal union would ever be ratified I am not European so the entire euro thing is a mystery to me anyway.

Art Cashin reminded everyone last week that two decades ago Margret Thatcher called the euro as "perhaps the greatest folly of the modern era." In her biography she said "Germany would be phobic about inflation, while the euro would prove fatal to the poorer countries because it would devastate their inefficient economies." Cleary that has come to pass. Thank you Art for the memories!

Enter passively, exit aggressively!

Jim Brown

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"Courage is not the absence of fear, but rather the judgment that something else is more important than fear."
Ambrose Redmoon