Europe may be heading for another wasted summit but fund managers window dressing for quarter end pushed stocks higher.

Market Statistics

It was a technically driven market today with traders taking profits from their shorts and fund managers dressing up their portfolios with long positions ahead of the quarter end. Cash is trash on fund statements for the first half of the year so managers nibbled at stocks despite negative economic news and a potential letdown from the EU summit.

The U.S. economics continued to disappoint with the Consumer Confidence for June declining to 62.0 from May's previously reported 64.9. This is the lowest level since January. The May number was revised down to 64.4. The present conditions component improved slightly from 44.9 to 46.6. However, the expectations component fell sharply from 77.3 to 72.3.

Buying plans were relatively unchanged with 10.6% of respondents planning on buying a car and 5.0% planning on buying a home. Those home plans were up from 4.7%. Appliance buying plans declined to 45.5% from 47.4%.

Those who expect weaker business conditions six months from now rose +3.3% to 16.2%. Those that expect stock market gains over the next year fell -6.5% to 23.7% and the lowest level in a year.

Job worries appeared to be a growing concern given the declines in the payroll reports for the last couple of months. Worry over the approaching fiscal cliff and continuing troubles in Europe were also a weight on confidence.

Consumer Confidence Chart

The Richmond Fed Manufacturing Survey headline number fell into contraction territory at -3.0 for June from +4.0 in May. This was the first decline into contraction territory since October. The cycle high was +20.0 in February.

New orders declined sharply to -12.0 from +1.0 compared to its high of +21 in February. Backorders declined to -18 in June and improved only slightly to -16.0 in June. The employment component declined from 16.0 to 8.0 and the average workweek fell from 11.0 to -2.0.

This was one more regional indicator suggesting the economic activity in the USA is rapidly decelerating.

Richmond Manufacturing Chart

The Case Shiller Home Price Indexes showed prices declined -1.9% in April compared to the prior rate of -2.6%. This is the slowest rate of decline in several quarters and the non-seasonally adjusted numbers actually showed gains of +1% to +2% in the various indexes.

The economic calendar for the rest of the week is highlighted by the Kansas Fed Manufacturing Index on Thursday and the EU summit on Thr/Fri. The GDP will also be important but as the final revision there are no major changes expected. Jobless claims will be important if they tick over 390,000 otherwise they should be ignored.

Economic Calendar

The big weight on the market will be the European summit on the sovereign debt crisis. Spain officially asked for a bailout, not that there was ever any doubt. Cyprus also made their request official at 10 billion euros or more than half their GDP.

The Greek PM will not be attending due to health reasons so that sideshow will not happen. The troika cancelled their trip to Greece ahead of the summit. Italy and Spain will attend and they will be the main topic of discussion.

The proposals for group liability euro bonds to finance sovereign debt died a highly visible death today with German Chancellor Angela Merkel saying there will be no joint liability euro bonds "as long as I live." She said joint bonds would eliminate the perceived need for indebted countries to fix their public finances if 16 other countries were guaranteeing their debt.

This is the 20th major summit since 2010 when the debt crisis began. There have been dozens of other meetings with subsets of the finance ministers, budgetary officials, etc. This meeting is likely to fail just like the prior 19 because there is no common ground. This is 17 countries, each with different economies, different social structures and different views on spending, debt and taxation. The odds of them ever agreeing until they are at the very brink of disaster are about zero.

Italy's PM Mario Monti said last weekend the leaders had only one week to save the euro and the lack of a breakthrough agreement at this summit could be terminal. George Soros echoed his comments saying the lack of a major breakthrough this week would lead to a disintegration of the eurozone. While both of those men may be right in the long run the odds of a breakup in the near future are about zero.

The summit will likely produce another agreement to agree or a plan to come up with a plan in hopes of kicking the can farther down the road. Eventually this lack of real action will be disastrous but it will be more of a slow motion train wreck rather than a sudden implosion.

The problem is accelerating to a conclusion. Spain sold three billion euros of three-month bills yielding 2.362%. That is three times the 0.846% at the prior auction. The bid to cover ratio fell to 2.8 compared to 4.3 in the prior auction. The yield on the ten-year notes rose to 6.87% in the open market. Unless something material happens at the summit it is only a matter of time before Spain's yields become unsustainable. Moody's helped increase the negative sentiment when it downgraded 28 of Spain's banks.

Aggravating the situation was a downgrade of German debt by Egan Jones with a warning German finances will suffer regardless of whether Greece leaves the euro. Egan Jones said Germany's financial exposure to the weaker countries in the euro would increase as economic conditions worsened. With each bailout there is one less country to share in the contributions to the bailout funds. The ratings firm said every bailout increased the amount of uncollectable receivables Germany faced. Egan Jones said the direct and indirect exposure of Germany and its banks was 2.9 trillion euros and would push its debt to GDP to 114%.

While we wait for the EU can kicking to occur there was plenty of stock news today. Amazon rallied +$5 on a report from CNET they would release a new version of the Kindle Fire before July 31st and just in time for back to school shopping. The new version of the tablet would have a camera, better graphics and still be priced at only $199. Pacific Crest Securities said orders for components for the Fire had jumped +60% from initial expectations suggesting sales were booming or there was a new product in the pipeline. The same CNET report said Google will announce its own 7-inch tablet as early as this week and it would also be $199.

Amazon Chart

Zinga (ZNGA) shares fell -5% after they announced new games and new ways to play and share across multiple networks. Unfortunately the announcement was a letdown for some and confusing for others. They also announced they were opening their platform to developers from all over the world. Analysts are concerned Zinga could end up with too many titles of lackluster games that would take away from the ones that really generate income.

Zinga chart

Best Buy (BBY) founder Richard Schulze may be considering a bid to take the company private according to a report by the Wall Street Journal. Schulze founded the company in 1966 and still owns about 20% of the shares. Fidelity is the second largest owner at 6.9%. Schulze is 71 years old and may have trouble getting a buyout partner at his age. The WSJ said his preference was to take the company private but he could still sell his entire stake as another option depending on the outcome of a search to find a partner. Shares of BBY spiked more than 15% on the news but quickly faded to end with only a +4.6% gain.

Best Buy Chart

Seagate Technology (STX) rallied +4% on news the company was being added to the S&P-500 to replace Progress Energy, which is being acquired by Duke Energy. Volume was more than 20 million shares compared to average volume of 12 million. Seagate will be added to the S&P after the close on Friday so there should be more gains later in the week as fund managers are forced to buy shares.

Seagate Chart

News Corp (NWS) rallied +8% after news broke they were considering splitting the company into two pieces. The book and newspaper business would be split off from the TV and movie business. The newspaper business would be worth about $5 billion. That is roughly the amount he paid for Dow Jones and the WSJ in 2007. Most investors never liked that acquisition and the stock sold off after hitting a high in early 2007. The news today propelled them to a new five year high even though a split could take a year to accomplish.

News Corp Chart

Celgene (CELG) rallied +3% after Cowen & Company upgraded them to outperform. Celgene fell nearly $10 last week on news they delaying plans to market myeloma treatment Revlimid to a wider audience. The stock has already recovered $4 of that decline. Cowen said the impact of the announcement was way overdone and they had 15 drugs in the pipeline that could gain approval through 2015. Cowen said, "Although our forecasts for revenue growth remain below consensus and the company's 2015 guidance of $8-9 billion, we view Celgene as having a solid base business (highly visible and predictable revenue, high barriers to entry, improving margins, lower taxes) that is trading 10-15% below fair value based on our NPV analysis."

Celgene Chart

Lennar Corp (LEN) rallied after the company signed a letter of understanding with China Development Bank for a $1 billion loan to fund projects in San Francisco. The loan would be made over the next five years but only if China Railway Construction Corp is awarded a contract of at least $1.5 billion to build roads and bridges for a project at the nearby Hunters Point shipyard and Candlestick Point and Treasure Island. The projects include a $13 billion plan to redevelop the two locations, which were previously U.S. Navy sites. Sales at Hunter Point are scheduled to begin later this year with homes in the $525,000 range. More than 8,000 homes could be built on Treasure Island, which was built on a landfill in 1939 for an exposition. Shares of LEN rallied +3% on the news.

Lennar Chart

Brent crude prices rallied more than $2 today after Iran said it would close the Strait of Hormuz if the planned embargo started as planned on July 1st. To combat this the U.S. navy said four additional minesweeping ships arrived in the Persian Gulf to give the navy more options if Iran were to cause trouble. The navy already has four minesweepers in the gulf and Britain has its own contingent. The navy has two aircraft carrier battle groups in the region headed by the USS Enterprise and the USS Abraham Lincoln. The French carrier HMS Charles de Gaulle and support ships is also in the gulf. The U.S> navy has reportedly ordered another 200 Tomahawk cruise missiles to be deployed on warships in and around the gulf. The U.S. air force has deployed an "unspecified" number of F-22 Raptor fighters to the Al-Dhafra airbase near Abu Dhabi. Clearly the U.S. is preparing for a confrontation.

Iran is reported to have more than 2,000 sea mines including advanced Russian weapons that could be used to block the narrow 112 mile long strait. Iran also has sophisticated Chinese land launched anti-ship missiles. Iran has said the implementation of the embargo will be recognized as an attack on Iran and if the country cannot sell oil then they will close the strait and nobody else in the region will be able to sell it either.

The EU announced there will be no delay on the embargo and it will begin on July 1st as planned. All oil contract with Iran will be halted as of July 1st. The Brent contract rallied as a result while the U.S. delivered WTI contract barely made it to positive territory. I heard one report suggesting fund managers were covering their shorts in Brent ahead of the embargo just in case a conflict broke out.

Brent Crude Oil Chart

WTI Crude Oil Chart

July natural gas futures will expire on Wednesday and options on those futures expired today. The gas contract closed at $2.81 and a five month high. Temperatures in some areas of the country have been 20 degrees above normal and in many areas 10 degrees above normal. This is causing a sharp increase in the amount of gas needed to generate electricity.

In addition to the futures expiration Baker Hughes reported another drop in the number of rigs drilling for gas. The gas rig count fell by 21 rigs to only 541 and the lowest level since August 20th 1999. That is down -42% from the 2011 peak of 936 rigs that was set in October. The oil rig count rose +16 to 1,421 and the highest level since BHI started categorizing rigs by drilling activity in 1987. The high for 2011 was 1,003 rigs drilling for oil.

Adding to the price pressures was news that 17% of Gulf of Mexico gas production had been shut in because of tropical storm Debby.

Debby is starting to weaken and has reversed direction to make landfall in Florida and is no longer a danger to the Gulf oil and gas installations.

Natural Gas Chart

The market rebounded today on what could be called end of quarter buying. Cash is trash on fund end of quarter statements. While that could be possible there is also a good chance institutions were simply squaring away positions ahead of the expected volatility surrounding the EU summit and the Supreme Court decision on Obamacare on Thrusday. Add in the GDP, Kansas Fed Survey and a dozen other reports and there was ample reason to position your portfolio for some instability.

The S&P rallied back to 1325 one more time and then stalled at that resistance level. This is neutral ground right in the middle of its recent range. This is a good place to wait out the coming storm. Initial support is 1310 and initial resistance over 1325 is 1335. A strong move in either direction that breaks those levels is likely to keep going.

S&P Chart

The Dow dip on Monday did not make it down to support at 12,400 from early June. For two days now we saw the declines stop at 12,450 for a minor higher low. However, resistance ar 12,580 was rock solid.

There is really nothing to be determined by the Dow's action today. The +32 point gain came after a -50 point drop at the open but selling at the close knocked -40 points off th eintraday highs. This was a place keeping day with winners and losers inside the Dow almost dead even.

There is a narrow range of resistance and support about equal distance from the Dow's close. Both are relatively strong and a breakthrough of either would be a strong directional signal.

Dow Chart

After being pummeled on Monday the Nasdaq managed to gain +18 points and move right back to initial resistance at 2860. This is at the top end of its recent range and was helped by a small gain in the chip stocks and big gains in GOOG and AMZN. Apple was again missing from the top 20 Nasdaq gainers. It closed positive with a $1 gain but right on support of $570 once again.

After the big four day -110 point decline in the Nasdaq it was time for some pressure equalization. It had gone from overbought to oversold very quickly and today was just traders squaring positions ahead of the many unknowns due out later this week.

Nasdaq Gainers

Nasdaq Chart

I would not spend too much time trying to understand what happened in the markets today. For that matter I would not try to analyze the outcome of the various events later this week. We should have a much clearer picture by the close of trading on Monday. All the various events will have been factored in and trades closed. Starting next Tuesday traders should begin really positioning themselves for the Q2 earnings cycle.

Europe will still be a problem but there should not be any short term dates to cause trouble. If they are successful in kicking the can farther down the road the focus will turn to U.S. earnings. Whether that is good or bad depends on the pace of warnings for the rest of this week.

Enter passively, exit aggressively!

Jim Brown

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