The headline standoff between Greece and the IMF, EU and ECB continues as the countdown clock continues to wind down. Another series of emergency meetings are scheduled for Monday and the outlook has not changed despite the severity of the looming disaster. Equities sold off ahead of the weekend event risk.
Speaking at an economic forum in St Petersburg Greek Prime Minister Alexis Tsipras warned that Greece had other "friends" it could turn to for help if the talks with the Troika failed next week. He was implying that Russia and China would kick in some cash in exchange for some future favors. He has held several meetings with Putin and while nobody has said so publicly the price for a Russian bailout is probably an agreement to base a Russian fleet in Greek harbors. That would be a major security issue for the eurozone and something they do not want to happen. The Chinese could offer Greece a bailout in exchange for a similar foothold in Southern Europe. This is also a nonstarter for the EU.
When Tsipras spoke he said the problem of Greece was not a Greek problem but a European one. Putin repeated that claim saying Tsipras was right. "If you owe someone a lot, then it is already not your problem but the problem of the one you owe. That is an absolutely correct approach."
However, the EU cannot keep pouring money into Greece because it is a bottomless pit. The money they are fighting about today is about 7 billion euros of undistributed cash from prior agreements. Greece has a 1.5 billion euro payment due to the IMF on June 30th and 7.5 billion due to the EU and ECB in July and August. If a deal is struck the funds will only rest in the Greek accounts for a few days before going right back to the IMF and EU/ECB. Loaning Greece money to pay interest payments on the existing loans is like getting a cash advance on your credit card to make the monthly payment.
Greece is bankrupt and everyone knows it. Tsipras said it is the fault of the Troika. They should have never loaned us the money because they knew we could not pay it back. His solution is for the Troika to forgive the debt of about 340 billion euros or at least reduce the principal amount significantly.
Greece cannot pay its own government expenses much less pay interest on the bailout debt. This entire process over the last five years has been a slow motion train wreck. What happens next week will only be one more step in the Greek exit process.
I do not expect the Greek headlines to go away. I believe we will see another interim deal where the EU kicks the can down the road to give everyone some breathing room. They will continue to extend the terms on the debt and pretend Greek will eventually pay it off. At this point, hope should not be a strategy for the EU. Unfortunately, they have too much wrapped up in this eurozone experiment and they cannot afford to abandon it. Spain, Italy and Portugal are waiting patiently and watching to see what happen to Greece. If the EU reduces the principal on the existing bailout loans those other countries will immediately demand a principal reduction on their bailouts as well.
While Greece has reached the 11th hour in the negotiations, it is a bogus deadline. Regardless of what happens the problem will remain. Greece will still be bankrupt. The equity market will just have to get over it and move forward. Traders are already fatigued over the multiyear process. They are somewhat complacent that a deal will get done or extended because it has always happened in the past. Over the last five years the Greek debt has been restructured to where the IMF, EU and ECB own 90% of it. The equivalent of a Greek bankruptcy should be relatively contained and not impact the rest of Europe. Draghi will dump several hundred billion euros of QE into the market and the Greek impact will only be a blip on the chart.
I am done with Greece. I am sure our readers are done also. I wish there was really going to be a resolution next week and the problem disappear. Unfortunately, that is not going to happen and we just have to ignore the headlines in the months ahead. I believe that once the disaster headline appears the market will get over it quickly. I just wish the EU would rip the Band-Aid off and end the uncertainty.
There were no material economic reports in the U.S. on Friday. Next week is a full calendar with Greece the headliner on Monday. The EU Finance Ministers are holding an emergency meeting at 9:AM ET on Monday. About four hours later the EU leaders will meet and decide how they want to proceed. After these meetings the ECB will make a decision on how much longer they are going to continue supporting the Greek banks. Reuters said another 2.2 to 2.7 billion euros were withdrawn on Thursday and Friday. That is in addition to 2 billion that were withdrawn in the first three days of the week. The ECB gave them another 3 billion on Friday in order to keep them open through the weekend. The ECB has advanced the banks 83.7 billion euros under the emergency liquidity assistance (ELA) program to prevent the banks from failing. Without the daily support of the ECB the Greek banks could not open for business and the disaster would begin.
Donald Tusk, the head of the EU Council put out a video on Friday. He said on the video, "This game of chicken needs to end. The blame game also needs to end. This is not a game and there is no time left for games." He warned that there would be catastrophic consequences if there were no resolution. Tusk Warns on Default
There is a flurry of economic reports with home sale, Richmond Fed Manufacturing and the GDP revision the most important for me.
UnderArmour announced a 2:1 split but the new shares will be class C shares with no voting rights. Google did this a year ago and was sued for it but they won the suit. UnderArmour will announce the split dates after the board meeting on August 26th.
Netflix is the most heavily anticipated split but still no word on the date or ratio.
The European markets closed mostly positive so it did not appear they were too concerned about the impending crisis over Greece. The German DAX has been weak because investors are afraid Merkel will do something to end the Greek problem and it will cost Germany some more money.
The Chinese markets are in correction mode with a -13% decline for the week on the Shanghai Composite. It was way overdue after a +160% rally over the last 12 months. It is too soon to know if the bubble is bursting of if this is just a needed pause. Chinese citizens have been opening new brokerage accounts at the rate of 3 million a week and a clear example of irrational exuberance. This comes at a time when the Chinese economy is declining to the lowest level in 19 years. This was the worst week for the Shanghai market since 2008.
The U.S. equity market may have sold off on Friday but investors were buying treasuries in a flight to quality ahead of what could be a rocky week. Yields have fallen from 2.49% on the 10th to 2.267% at Friday's close. If Europe self-destructs next week because of Greece, some investors wanted to be in the safety of treasuries. With the FOMC statement and Janet Yellen avoiding any direct mention of timing for the first rate hike some investors felt the coast was clear for at least three more months.
San Francisco Fed President John Williams was not following the party line on Friday. In a speech he said the Fed should raise interest rates twice this year. "My own forecast would be having us raise rates two times this year, but that would depend on the data." His expectations for economic growth are better than Yellen's. Williams wants the Fed to raise rates earlier so it can afford to tighten gradually. He is worried that rising oil prices and the dollar could cause inflation to rise faster than expected and force the Fed to tighten faster and that would disrupt the markets.
In the Fed's dot-plot seven officials projected fewer than two rate hikes in 2015. Five projected two increases and another five projected three increases. Clearly some on the Fed are way out in left field based on the economic data. You have to wonder if they are "projecting" those extra rate hikes to shock the markets and create volatility on purpose. There are no names attached to the plots so the survey is anonymous.
Basically each Fed official places a dot where they think the interest rates will be at the end of each year. By assuming each rate hike will be 25 basis points you can calculate how many rate hikes would be needed to reach the average.
There was little news in the equity market and that probably accounted for some of the profit taking. There was nothing to keep investors enthused after the new highs on Thursday. Ambarella (AMBA) was a big mover after short seller Citron Research called the share price "ridiculous" and slapped a $60 price target on the stock. Citron is known for high profile short calls and quite a few fail to decline as Citron expects. I guess loading up on shorts and then making a high profile and highly questionable claim is one way to invest.
Ambarella makes chips for high definition audio and video cameras. One of their major customers is GoPro. Citron said their chips are becoming a commodity item and they are "coming up short in the innovation department." Most analysts disputed the Citron call as just another headline grab.
They IPOed in October 2012 at $6 and shares are up +1880% to $128 on Thursday. I had been hoping for a correction to get an entry point since mid May when they began exploding higher and broke above uptrend resistance. Maybe this is going to be my chance. They will have to drop about $20 more to make it interesting enough to go long.
Twitter shares rose +3.5% in a bad tape. MKM partners put out a note saying the social networking company could grow to a valuation of $100 billion if it executes on its strategy to grow and monetize its user base. Twitter's market cap was $23 billion on Friday. Analysts also liked the new changes Twitter announced in Project Lightning that include ways to monetize users that don't have accounts and increase the stickiness to the Twitter website through curated events. Twitter editors would pull together related threads and content surrounding high profile events like a music awards show, price fight or sporting event. Twitter also bid on streaming NFL games.
Twitter is also testing product pages that would make it easier to shop. The new feature would organize tweets on dedicated pages which feature images and video of the product along with the description, price and an option to buy or visit the website for more information. I think it is way too early to count Twitter out. Whether they rebound and thrive on their own or are acquired by somebody like Google, Microsoft or Apple, they will be around for a long time and once they figure out the right combination of features the users will come.
Hershey (HSY) shares declined -3.5% after they warned on full year earnings. The company said sales growth would be 2.5% to 3.5% compared to prior forecasts for 4.5-5.5%. Earnings per share forecasts were cut from $4.30-$4.38 to $4.10-$4.18. The company said weak sales in China were to blame. Q1 sales in China were only half the same period in 2014 and missed forecasts for April and May. Hershey said slowing economic growth in China had forced consumers to cut back on spending even during the festive holiday seasons.
The company is also struggling in the U.S. because health conscious consumers are buying less candy. Hershey said it was also reassessing the value of Shanghai Golden Monkey Food, which it had agreed to buy for $584 million in 2014. Hershey is scheduled to acquire the remaining 20% stake in September. I suspect a problem for Golden Monkey in getting that final 20% without a haircut.
Micron (MU) was cut to a sell by Morgan Stanley on Monday and shares fell to a 52-week low at $23.70. On Friday Topeka Capital Markets upgraded the company from hold to buy and raised the price target from $30 to $34. Shares closed at $24.47. The analyst said he was encouraged by the cost improvements in the DRAM chips, steady improvement in TLC 3D NAND that could drive an inflection point and a commitment to returning capital while maintaining a competitive capex level. Improvement in technology is reducing costs and improving margins.
KB Homes (KBH) reported earnings of 10 cents compared to estimates for 8 cents. Revenue of $623 million rose +10.3% and beat estimates for $619 million. Net orders rose +33% to 3,015 homes. They delivered 1,787 in Q1 with an average selling price of $338,500. Net orders rose +38%. Shares rallied +9% on the news.
Conagra (CAG) shares rallied +11% after activist investor Jana Partners disclosed a 7% stake and intentions to nominate three board members. Jana accused the company of underperforming and shareholder wealth destruction. Conagra markets dozens of brands of prepared foods from Peter Pan, Reddi Whip, Hunts ketchup, Slim Jim jerky, Snack Pack pudding, Rotel, Healthy Choice, Swiss Miss, Wesson Oil, La Choy, Orville Redenbacher, Tennessee Pride, Egg Beaters, Wolf Brand Chili, Manwhich, Pam, Van Camps, Rosarita Beans, Ranch Style Beans, Fleischmann's, Blue Bonnet, Parkay, etc. Conagra said it would be willing to engage with Jana after their earnings on June 30th.
Oppenheimer raised the price target on Netflix (NFLX) from $610 to $800 and maintained the outperform rating. Analysts said this was based on the aggressive plans to enter multiple overseas markets in 2015. Netflix plans on entering Spain, Cuba, Japan, Italy and Portugal in 2015. They already launched in Australia and New Zealand in March. The majority of the costs were incurred in building out the original platform in the U.S. and additional costs to expand into other countries are minimal. Still no word on the pending stock split.
Martha Stewart Living Omnimedia (MSO) shares rallied +12% on Friday after a +26% spike on Thursday. Sequential brands (SQBG), owners of Linens N Things and the Franklin Mint, appears to be near a deal to acquire MSO. All I can say is thank you. Martha Stewart has posted losses in three of the last five quarters and revenue growth has declined every quarter for the last 14 quarters. It is about time somebody put MSO out of its misery. No price was given and no deal has been completed but talks are nearing completion.
There are 17 IPOs scheduled for next week that will raise a total of about $2.5 billion. That alone will take some of the air out of the market as discretionary funds are used to purchase those shares. There are three energy stocks, three cloud stocks and four healthcare stocks plus credit reporter TransUnion and a variety of others.
Companies scheduled to price this week:
CNX Coal Resources LP
AppFolio Property Manager
Green Plains Partners LP
Read these next paragraphs carefully there will be a test at the end.
Baxalta (BXLT) will replace QEP Resources (QEP) in the S&P-500 after the close of trading on June 30th. Priceline (PCLN) will replace Baxter International (BAX) in the S&P-100. Baxter is spinning off Baxalta later this month.
QEP will replace Itron Inc (ITRI) in the S&P Midcap 400 and Itron will replace Arch Coal (ACI) in the S&P Small Cap 600.
Skechers (SKX) will replace Rock-Tenn (RKT) in the Midcap 400. MiMedx (MDXG) will replace Skechers in the Small cap 600. MeadWestVaco (MWV) is merging with Rock-Ten and the merged company will change its name to WestRock and remain in the S&P-500.
HealthEquity (HQY) will replace Zep (ZEP) in the Small cap 600. PE firm New Mountain Capital is acquiring Zep in a transaction to be completed on June 25th.
Test question: Who is on first? (Abbott & Costello skit)
Crude prices were flat for the week with only a 29-cent decline. The volatility in crude prices has evaporated and the narrow range is shrinking ahead of the July 4th weekend. This is typically the peak for prices in both gasoline and oil. The U.S. average for gasoline rose to $2.80 per gallon but that is still well below the same period in 2014.
There is also a new challenge for the oil market. The International Energy Agency (IEA) tracks oil production and demand all around the world. In their monthly numbers there is an "adjustment" for barrels they can't find or don't know where they went. In Q1 that adjustment was 1.2 million barrels per day or Mbpd. In Q4 it was 1.6 Mbpd. Those are the highest numbers since reporting began in 1998. The IEA claims there is 2.0 mbpd of excess production today. In theory if there was that much excess then global inventories should be rising by 2.0 mbpd. Unfortunately, they are only rising by 800,000 bpd so the IEA has to reconcile this discrepancy.
If they revise the Q1 numbers as they have in the past then demand estimates could rise by as much as 1.2 mbpd and that would be a monster plus for the oil market. Oil prices could explode higher if it was learned that excess production had declined to only 800,000 bpd and demand was significantly higher. While we wait for the IEA to balance their numbers the oil market is in limbo with prices hovering right at $60.
Because of the potential impact to prices I expect the IEA to cover over their accounting irregularities and modify the results on a monthly basis as we move through the year. "Discovering" an error that large would hurt their credibility but they can fix it by adjusting the numbers by a smaller amount every month.
The active rig count declined by -2 rigs last week to 857. Active oil rigs declined by -4 to 631 and a ten-year low. Gas rigs gained +2 to 223. Offshore rigs declined -2 to 27 and are now -32 rigs lower than the same period in 2014.
The S&P lost -11 points to close at 2109 on Friday. That ended the streak of positive gains at three days. The S&P has not been up four consecutive days since January. That should give you some clue as to how volatile yet range bound we have been over the last three months.
The S&P rebounded to resistance at 2120 in the Thursday short squeeze and immediately began to weaken. The selling on Friday was persistent and volume was high at 8 billion shares. Volume should have been high because of the quadruple witching options expiration and a minor rebalance of the S&P-500 at the close.
If we only look at the chart and not try to pin any historical trends to the week's trading then the outlook remains slightly bullish for the big caps. However, the week after June expiration is historically negative with declines in 22 of the last 25 years. I chalk that up to funds restructuring and window dressing their portfolios ahead of the midyear statements. That is just my opinion.
In late May I discussed the possibility for June to end higher in contradiction to various historical patterns. If we ended the month here that prediction would have come true. However, there are seven trading days left in June and anything is possible. That is especially true given the disaster playing out in Greece.
The internals on the S&P improved slightly with Thursday's short squeeze but not enough to proclaim the worst is over. The percentage of S&P stocks under their 200-day average fell to 61.8% at Friday's close. The 50-day percentage improved a little more from the 34.3% reading early in the week to 52.4% on Friday. However, that is a short-term average and changes should be more dramatic.
The volume was 3:1 in favor of advancers on Thursday and not as strong as you would have expected given the big gains in the indexes. Volume on Friday was just over 2:1 in favor of decliners. It was hardly a landslide but a lot of that volume was rebalance shares and that skews the ratios.
Possibly a more revealing chart is the Bullish Percent ratio for the S&P. Only 62.2% of the S&P stocks have a buy signal on a point and figure chart. That is the second lowest reading for the year and the third lowest over the last two years. This chart is not bullish.
There is the potential for a head and shoulders formation using the rally to 2120 back in April as the left shoulder. If that pattern completes with the neckline at 2080 we could easily be looking at a drop to 2040. I am not claiming that as a pattern today but the possibility exists.
Support is now 2100, 2090 and 2075. Resistance is 2120 and 2130.
The Dow punched through resistance at 18,100 on Thursday but then fell back to close at 18,113 and just above that prior resistance. It gapped down on Friday and never looked back to close at the low of the day at 18,011. That 18,100 level has been resistance since December and although it has been pierced numerous times the Dow always fell back below almost immediately. The two major breakouts lasted about a week before giving back their gains.
Support at 17,800 eroded to 17,750 but it also has been firm except for some intraday incursions. That gives us a range of about 17,750 to 18,150 for the Dow to wander without having to pick a direction.
I went through the charts for all 30 Dow stocks again and conditions have improved. There were five with an uptrend, six neutral and 19 with a negative trend. Many with a prior negative trend had 2-3 day spikes but were not enough to make a higher high and break them out of their downward trajectory. The neutral stocks did have bounces that put their prior trends in jeopardy but not enough to class them as positive. With 19 in a negative trend and only 5 positive, the Dow is going to have a tough time punching through overhead resistance without a breakthrough resolution in Greece.
The Nasdaq is giving us mixed signals. The Nasdaq Composite broke out to a new high, thanks to the biotechs, but the Nasdaq 100 is still lagging. The big caps are struggling with things like earnings and the strong dollar while the broader composite has a lot of smaller stocks that are not exposed to those overseas concerns.
The Composite index declined only slightly on Friday with a -16 point drop but remained over prior resistance at 5100. The composite index is still in breakout mode.
The NDX is still fighting resistance at 4540 and it declined a steeper -18 points on Friday. Until big caps come back into vogue, the NDX is going to be challenged.
The Russell 2000 small caps were the picture of strength on Friday. After surging to a new high close at 1284.68 on Thursday, they declined only -0.0154 points on Friday. That is as close to breakeven as you can get. They held their gains despite a negative day on the big cap indexes.
This has to be window dressing by the funds for small caps to be favored ahead of the summer doldrums when they do not normally perform well. We stand a good chance of seeing some window undressing in early July.
The Dow Transports are trying to recover but are really struggling. Three times now they have rebounded off the 8260 level but after the first bout of short covering they turn negative again. Friday's high was another lower high and the index closed on the low for the day. Despite their attempt to pull themselves back into relevance the Transports still lost -5 points for the week and the only major index to lose ground.
If the Transports dip back to that 8260 level again I would not expect it to hold. The fourth time is rarely the charm.
With the market historically weak after June options expiration, I would not be too positive about our chances for a continued rally. With the potential for Greece to self-destruct early in the week that is another negative influence.
However, if by chance the EU decided to kick the can farther down the road and throw Greece a lifeline on Monday the markets could explode higher on short covering. This continues to be the most hated bull market in history and investor participation is very light. That means there are a lot of investors on the sidelines waiting for the eventual correction. The S&P averages a 15% correction every 430 days and we are well over 900 with not a dip in sight.
On the plus side Bank of America said $10.3 billion in cash flowed out of the bond market last week and $10.8 billion flowed into equities. There is a chance the "great rotation" is near. Bank America Risk has Been Reset If that is the case there is plenty of firepower still lurking in the bond market. Since the 2009 lows more than $600 billion has flowed into the equity market. Over the same period more than $1.3 trillion flowed into bond funds. Once interest rates really do begin to rise a lot of that cash is going to rotate into equities and the rally will be huge. That could be triggered by Fed action in September, which is the worst month for the equity market with many market lows set in September and October. What a perfect time for cash to come roaring out of the bond market.
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Apple (AAPL) is suffering from the Dow Curse. Historically companies tend to rally in the three months before they are included in the Dow but then underperform in the months that follow. I wrote about this when the announcement about Apple's inclusion was made. Since 1999 sixteen stocks have joined the Dow not counting Apple. On average those 16 stocks gained only +1% in the six months that followed compared to an average 11% gain in the six months prior to inclusion. The theory is that the outperformance in the stocks brings them to the attention of the Dow committee. Once they are included the news fades and so does their stock price.
Apple is three months into its Dow experience and shares have declined -0.5% compared to a 13% gain in the prior three months before their addition. Birinyi Associates carried the analysis one-step further. According to Birinyi the 16 companies added after 1999 declined on average -7% over the next year after rising an average of +25% in the year before their addition. Dow Curse Alive and Well
I guess the play here would be to short every Dow addition with a 12 month time horizon.
Greece has already spent all its available funds for salaries, pensions, expenses and prior bailout payments. They have already pillaged the funds held by banks and many suppliers have not been paid in months. Tax revenue is rapidly declining because of the expected government default. Everyone is holding what cash they have rather than pay their taxes and see the money evaporate just when they need it the most. Greece has ordered all public authorities to hand over all spare cash to the central bank. That means government services have no money. Every euro that comes into the service goes straight to the government. Every month sees tax debts to Greece rise by 1 billion euros because nobody is paying. Tax Debt Rises 1 Billion Euros a Month
Even if a deal was reached next week the country is still bankrupt. Giving them the 7 billion euros of previously authorized bailout funds only pays for the interest payments due on the bailout through July. There would be no money to operate Greece and pay salaries, etc. This will eventually end badly regardless of what happens this week. The most likely resolution is another extension of some kind to kick the can farther down the road. Everyone knows Greece cannot pay. The EU either kicks Greece to the curb or makes a conscious decision to support them for years to come.
Alexis Tsipras said on Thursday, "Without a deal that undoes some of the punishing austerity, we will assume the responsibility to say 'the great no' to a continuation of the catastrophic policies." That means without reducing the principal on the 340 billion euros of debt and ending the austerity demands currently levied on Greece, he will just default and let the chips fall where they may. Understanding Greek Demands
JP Morgan warned that "the collateral has run out" and the ECB will use the nuclear option if no deal on Monday. If no deal is reached the ECB will likely cut off aid to Greek banks under the ELA program. That would mean bank closures in Greece and bring the economy to a screeching halt. Nuclear Option
The FOMC post meeting statement is always scrutinized word by word for any minor changes that could suggest the Fed's next move. They normally only change a few sentences and a word here and there. The only way you can really understand what changed is to compare each sentence with the same sentence in the prior report. I know that sounds really boring but people do it. Fortunately, some of this analysis is posted online for the rest of us. Here is the word for word comparison with notes supplied by David Merkel. Worth a read. Redacted FOMC Statement
"The Fed itself doesnâ€™t know where the economy will be next month, quarter or year. It never has. It never will. Economists donâ€™t know either."
Goldman said after the Fed statement and press conference the Fed will not raise rates until December or later. This was a change in their earlier forecast for a September rate hike. Prior to Wednesday 72% of economists projected a rate hike in September. Goldman said Yellen's characterization of the economy as "lukewarm" caused a reset in the outlook for a September move. Goldman - No Hike until December
It is probably not a surprise that the AAII Sentiment Survey changed dramatically last week. The very high neutral readings at 47.4% declined sharply to 40.3%. However, not all of those investors rushed into the bullish camp. Of the 7.1% that changed their neutral view, only 5.4% turned bullish to push the bullish sentiment to 25.4%. Another 1.7% turned bearish to lift the bearish total to 34.3%. The long-term bullish average is 38.8%, bearish 30.3% and neutral 30.9%. We are still above normal on neutral and bearish and well below normal on bullish.
The record string of 10 straight weeks of neutral sentiment over 45% was broken this week. The prior record was six weeks in 1998.
Quite a few traders are betting on a monster market drop. The Put/Call ratio on the Volatility Index ($VIX) at 0.28 is the lowest since the summer of 2008. That means there are more call bets on a rising VIX than put bets on a falling VIX. The VIX goes up when markets go down.
This could be insurance bets against a long portfolio or simply bets that we are headed for a significant decline. There is a mixed opinion on what this means for market direction. On a contrarian basis it would appear everyone is leaning bearish and we could be setting up for a decent rally. OR, a lot of traders are right about market direction and the market is about to decline. Good analysis here with pros and cons
Frank Zorilla had a good article on Thursday about fund managers being prepared for a correction. Various surveys making the rounds in the analyst community show that active managers have the least amount of equity exposure since the October dip.
He points out that large speculators held about 12,000 more short positions in the S&P futures than long ones as of June 9th. That is the highest number of bearish bets since October. Funds Prepared for Correction
Number of fund managers that have bought protection for the next three months.
National Association of Active Investment Managers Exposure Index (NAAIM) shows equity exposure at 60% despite the market being at record highs.
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