After spending two days considering the impact of their actions the Cypriot parliament voted against the Stability Tax on bank deposits.
The Cypriot Parliament voted 36-0 against the Stability Tax. The 19 members of the ruling party abstained from voting. To say the EU tax proposal was a bad idea would be a serious understatement. The banks are still closed until Thursday and the Parliament has adjourned until Thursday so there does not appear to be any chance for a new proposal until after the banks reopen. You can bet the amount of money on deposit will drop dramatically on Thursday morning.
Cyprus has two major sources of income. Those are tourism and financial services. A large percentage of those bank accounts are held for offshore owners. Cyprus is considered to be a hub for money laundering with a large number of accounts held by Russian millionaires. Many Russians keep their money in Cyprus and operate their businesses from there to be out of reach of the Russian government.
By proposing a 10% tax on bank deposits the Cypriot government has effectively killed the financial services business and money will be flooding out of the country late this week. Global flows of funds can change direction instantly. Nobody with an account in Cyprus will be leaving money there or adding money to it. Banks, already in need of a bailout, will be even further underwater by next week. By even considering this tax the country has severely damaged their financial system.
The EU Finance Ministers warned before the vote they would withhold the 10 billion euros in bailout loans unless Cypriot depositors were forced to share in the cost of the bailout. The ECB threatened to end emergency lending assistance for Cypriot banks. This story is not over despite the failure of the tax proposal.
The bigger problem is a worry by citizens in other countries with debt problems, primarily Spain and Italy, that this tax or one similar could come to their country. This will make eurozone citizens far less likely to leave their money in banks in those countries and that makes the banking system weaker.
The Dow fell triple digits at the open on Monday and rebounded slightly to close down -62 points. The Dow declined another -70 points intraday today but rebounded to close slightly positive with a +3 point gain. Support at 14,400 held despite the intraday dip. The afternoon spike was caused by a rumor the IMF, a member of the Troika managing the EU debt crisis, was going to step in and shore up the Cypriot banks. The rumor was quickly squashed but the rebound held into the close.
There was not much in the way of economics to move the market but the one significant report was bullish. New housing starts rose to 917,000 in February from the upwardly revised 910,000 in January. The initial January estimate had been 890,000. This was the second strongest month since mid-2008 and would have been stronger if it were not for the weather. Housing starts in February 2013 are +28% higher than February 2012. Housing permits rose by +42,000 to 946,000.
Housing Starts Chart
The big economic events left this week are the FOMC announcement and Bernanke press conference on Wednesday afternoon. Bernanke changed the timing of the two events to be closer together to prevent too much speculation in the press about the FOMC announcement. Prior quarterly FOMC announcements were at 12:30 with the press conference at 2:15. The times this week are 2:PM and 2:30. He felt the press had too much time to speculate on what the announcement meant and that created market rumors that required more effort to dispel. By shortening the time between events Bernanke hopes to control the narrative and suppress the surplus news flow.
There is no chance the Fed will take any action on Wednesday. The event in Cyprus has solidified the Fed's need to keep the U.S. markets moving higher. In the last FOMC minutes the Fed warned that "strains in global financial markets" were a downside risk to the U.S. economy. Clearly the appearance of the Stability Tax has shaken the European markets and will leave cracks for months into the future. The Fed will emphasize the "global risks" again as a reason to continue QE.
The Cypriot disaster and resulting weakness in the European financial system will be a benefit for the U.S. markets in the long run because we become an even more attractive safe haven for global money. With European markets week and U.S. markets setting new highs we are the beacon on the hill as long as the Fed keeps pumping out the QE.
Earnings out on Wednesday include FDX, ORCL, LEN, JBL and GIS.
The QE program and its impact on the market forced Morgan Stanley's Adam Parker to revise his year end S&P targets. Parker was one of the most bearish of the top 20 banks/brokers/analysts with a yearend target of 1,434. Yesterday he upgraded that to 1,600. The bear has become a bull. When asked why he made the change he said it was due to the impact of QE on equities. He said he has not really upgraded his earnings targets but is just responding to the realities of the market. He did say he would underweight consumer stocks because of headwinds for consumers. He suggested investors overweight industrials, healthcare and technology.
Goldman Sachs added 50 points to their yearend number raising it to 1625. They recommended going overweight on cyclicals with a focus on financials saying "Accelerating economic growth, improving ROE, rising rates, increasing dividends and buybacks will drive outperformance for financials in 2013."
Both upgrades were timed perfectly to allow investors the opportunity to increase their bullish positions on the Cypriot dip.
S&P Year End Forecasts - Updated
Unfortunately those upgrades did not help the energy services sector. In a presentation at the Howard Weil Energy Conference Schlumberger said U.S. drilling activity was below expectations and customers had reactivated fewer rigs than anticipated for the spring and summer drilling season. Drilling efficiency was improving and requiring fewer rigs. SLB had predicted 100-150 rigs would be reactivated by spring. However, Baker Hughes said last week the rig count had only grown by 13 so far in Q1. This is producing negative pricing pressure in many product lines in Q1. Growing competition in the sector is also increasing this pricing pressure. Overall they said they were standing by prior earnings estimates "if" activity improves in line with our prior expectations. That does not sound very promising since Q1 is over next week. SLB shares declined from $79 to $73 on the forecast. Other stocks in the services sector declined as well. Driller Helmerich & Payne (HP) also said the lack of increased drilling activity was pressuring rig prices.
Schlumberger did say "Outside North America, several non-OPEC countries show disappointing production trends with their output dropping year-on-year as a result of project delays and challenges in overcoming production declines. This will leave the call on OPEC production almost unchanged at a level above the group's production target of 30 mbpd. As a result the oil market is expected to remain tight and this will continue to support oil prices in the band that we have now seen since 2011." Oil demand is expected to grow +900,000 bpd in 2013 and Chinese demand will account for more than half of that amount.
Transocean (RIG) rejected Carl Icahn's demand they pay a $4 special dividend and recommended shareholders vote against Icahn's slate of board members. Transocean said the special dividend, "would adversely affect the company's ability to operate and compete effectively in a cyclical and capital-intensive industry. Further, the election of Mr. Icahn's candidates -- who are hand-picked to pursue his potentially damaging short-term agenda -- is not in the best interest of the company and all of its stakeholders." RIG shares declined -$1 on the statement.
Lululemon (LULU) shares fell for the third consecutive day after customers started returning their Luon see-through yoga pants. The problem is that they are not supposed to be see-through. The new batch of pants went on sale this month and almost immediately customers began returning them as "inappropriate" and too "sheer." The pants are made from a combination of nylon and lycra fibers and account for 17% of Lululemon sales. The company warned the recall could lead to inventory shortages and would impact earnings for Q1 and Q2. Lululemon has had problems with accidental see-through issues before and has issued cautionary warnings to try certain articles out in private before wearing them out in public. Good luck with overcoming this highly visible problem. LULU reports Q4 earnings on Thursday.
Adobe (ADBE) reported earnings after the close of 35 cents compared to estimates of 31 cents. Revenue declined slightly as a result of the transition to the subscription model but subscription revenue more than doubled to $224.3 million. Adobe announced last year it was switching from a one-time license fee for products like Photoshop and moving to a subscription model where you pay every month. That means there was a sharp drop in the one-time fees common to prior Adobe quarters but the subscription revenue will continue to rise as more users are forced to upgrade. Eventually it will mean more revenue because to get upgrades users will have to continue paying their subscriptions.
They have a new product called Creative Cloud that contains their most popular titles. The new product already has 500,000 paid subscribers and more than two million active free trials. They expect to have 1.25 million paying subscribers by the end of 2013. Adobe raised their estimates to $1.45 per share, up from $1.40 and above analyst estimates of $1.41. Adobe shares rallied +$2.50 in afterhours.
Liberty Media (LMCA) announced it was buying 27.3% of Charter Communications for $2.62 billion. Liberty has an option to increase ownership to 35% by January 2016 and to 39.99% after that date. Charter is the fourth largest cable TV, broadband Internet operator in the country. They have about 4 million video customers and 3.8 million Internet customers. On Monday Charter received approval from the FTC to proceed with its acquisition of cable operator Optimum West for $2.6 billion.
Video game maker Electronic Arts (EA) fell -8% after the Chairman Larry Probst said "We have mutually agrees that this is the right time for a leadership transition." That was the signal CEO John Riccitiello had overstayed his welcome. The sudden exit announcement was full of praise for each other and the company so I am sure there was a golden parachute settlement involved and everybody agreed to make nice for obvious reasons.
UBS warned that sales of motorcycles in January and February could have declined 4-5% at the dealer level. Harley Davidson (HOG) lost -3% on the news. UBS said the graying of the baby boomers was driving a trend change as prior riders hang up their leathers and pickup canes and walkers. In 2008 the average age of Harley riders was 48, up from 46.1 in 1999. Harley quit disclosing the age of riders in 2008 suggesting the trend change was accelerating. UBS said weather was also a tough challenge in Q1 with multiple storms and very cold weather.
The markets may be ready to start the next leg higher once the Fed announcement and Bernanke press conference moves into the history books on Wednesday afternoon. With Bernanke expected to once again affirm QE for the foreseeable future the equity markets should shake off the Stability Tax weakness and move back to challenge the highs from last week.
More importantly the dip gave fund managers eager for a buying opportunity ahead of the quarter end the dip they wanted. They can put extra money to work and actually show a profit on that investment over the next eight days. Once past month end we could see a different market metric appear but we will cross that bridge when we get there.
Despite three days of declines the S&P only dipped to initial support at 1,540. This is a very mild sell off given the strong gains since late February. The S&P could decline all the way back to 1,495 without damaging the long term trend. A decline of that magnitude would damage short term sentiment but the technicals would still be bullish.
The S&P has not yet reached the historic high close at 1,565 so that is the obvious target before month end.
S&P Chart - Daily
The Dow rebounded back into positive territory after the -70 point intraday decline to 14,382. That decline overshot the 14,400 support level by a few points but the rebound was quick. Nothing has changed for the Dow stocks and this two day decline was strictly headline related. The headline surprises simply gave investors a reason to take profits from the prior week. The intraday rebound today suggests the worst is over and assuming there are no new headlines out of Cyprus overnight or the Fed Wednesday afternoon we should see a new assault on the highs.
The Nasdaq Composite dropped back to support at 3,200 and then rebounded +24 points. The index did not make it to positive territory but it was a significant improvement. Today's close at 3,229 is still -30 points below the high close for last Thursday at 3,259 but at least the rebound lifted the index nearly 30 points above critical support.
Apple did not contribute today with a loss of a buck but it had gained nearly $30 over the prior two days. It is ironic we got the strong rebound in Apple when the rest of the market was selling off. If we can get the market and Apple both moving higher at the same time we will be in good shape. Most analysts believe Apple put in a bottom in the $420-$430 range and we should see gains from here. Today was the one year anniversary of their dividend announcement last March. Traders were hoping for a repeat performance but so far there are no dividend headlines.
Apple has $137 billion in cash but only $40 billion of that is in the USA. Their USA cash only rises by about $4 billion a year. They really can't allocate a lot of that to a dividend without crimping their capability. They can't bring the cash home from overseas without paying taxes on the money and they would rather use that money for their overseas manufacturing expenses. However, eventually Apple will have to bring some home. Apple and other corporations were hoping for a Republican victory in November and the expected free repatriation opportunity.
The Russell 2000 small caps dipped to initial support at 938 and posted only a minimal loss. There is no fear by small cap investors ahead of quarter end. Once we are out of the quarter it could be a different story. Uptrend resistance has held but a return to positive markets in general should see a new high on the Russell.
Russell 2000 Chart - Daily
It is all up to Cyprus and the EU overseas and the Fed at home. The markets are ready to move higher after a three day buying opportunity. Assuming no further headlines out of Europe and a repeat performance by Bernanke we should be moving toward new highs again over the last eight days of the quarter.
The problem with that theory is that Cyprus is still in trouble. They will probably in worse trouble after Thursday's expected run on the banks. Something will have to be done. A positive solution will lift the markets and days of ugly headlines will continue to weigh on the markets.
The European debt crisis is like a bad dream. It always ends the same way with a can kicking solution that guarantees it will be back a few weeks later.
On the plus side the Teflon market has shown a surprising resilience to bad news. Let's hope that continues. We are only a couple weeks from the start of the Q1 earnings cycle. S&P Capital IQ is only expecting earnings growth of +0.58% over the same quarter in 2012. That is hardly bullish and the markets are acting like it is 5.8% growth. Eventually fundamentals will matter but as long as the QE punchbowl continues to be refilled the market may not care about earnings. The market is drunk on QE and the bartender is refilling the punchbowl on Wednesday. What could go wrong here? S&P futures are down -3.50 as I write this.
Enter passively, exit aggressively!
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