The news out of Greece suggests there may be some kind of deal this week to kick the can farther down the road. That is ok with traders because it removes the short-term uncertainty. A couple of decent economic reports in the U.S. have increased bullish sentiment despite the expectations for faster rate hikes.
The markets started strong on Tuesday but faded intraday on protests in Greece and some analysts downplaying internals in the economic reports. Fed governor Jerome Powell depressed the markets when he said he favored two rate hikes this year in September and December. When pressed he repeated the party line about data dependence but at this point he thought the chance of a September hike was 50%.
He said he was forecasting stronger growth in the second half, a stronger labor market and a "greater basis in confidence" in inflation returning to 2%. His comments put him in a group of five Fed officials that expect two rate hikes in 2015. However, there are seven officials predicting less than two hikes in 2015. That was up from only three in Q1.
He said conditions in Europe were improving and China's economic decline was slowing. However, if the dollar remained strong it would be a "big headwind for the U.S. economy" and the Fed would have to take that into account in their rate hike decision. If the Fed hikes, the dollar will spike even higher.
If there is a resolution in Greece it will accelerate the chance of a Fed rate hike because that uncertainty will have been removed. News out of Greece is mixed with alternating demonstrations by various groups either for or against a deal.
There are no copies of the Greek proposal circulating and EU finance ministers have been working on the numbers and projections for about 48 hours now. Since there have been no obvious sticking points in the headlines there is a good chance something will get done. Reportedly the Greece proposal called for 8 billion euros in tax hikes from the wealthy, middle class and businesses as well as a hike in the national sales tax. The national tax would tax be 23% on nearly everything but food, energy, medicine, restaurants, books and theaters, which would be taxed at 11%. There would be some modifications in the pension program but details are sketchy.
Reportedly Greece would gradually raise the retirement age to 67 but no time frame for that adjustment was given. Currently the earliest retirement age is 55. The proposal calls for additional contributions by workers to the pension plan.
The basic theme in European headlines is that Prime Minister Alexis Tsipras surrendered. When it came right down to the deadline where Greek banks were going to be closed, he capitulated and relented on multiple policy fronts. While there is no deal yet the majority of analysts believe they will escape doom this cycle but there is no scenario where Greece will not need to borrow more money and the Troika is going to demand further austerity measures and we will get to replay this crisis all over again.
For now, the markets are assuming there will be a resolution because the ECB is holding the trump card. They can force a closure of the Greek banking system at any time and that would be catastrophic. Tsipras had run out of options and was forced to surrender.
In the U.S. this was a busy day economically. The New Home Sales for May rose to an annual pace of 546,000 units and well over estimates for 525,000. That was a 19.5% jump from May of 2014 and up +2.2% from April. New home sales for April were revised up from 517,000 to 534,000. Sales rose in the Northeast +87.5% and West +13.1% and declined in the South -4.3% and Midwest -5.7%. Strong sales in the Northeast were due to the June expiration of New York's Program 421-A, which offered significant tax incentives to developers.
The Richmond Fed Manufacturing Survey Index rose from 1.0 to 6.0 and a five-month high. The index had dipped to contraction at -8.0 in March and has been struggling back into positive territory.
The new order component rose from 2.0 to 11.0 after a -13.0 low in March. The backorder component rebounded from -10.0 to +6.0. The rest of the components showed only minimal gains.
The separate Richmond Services Index rose from 13 to 19. The only real negative was a drop in the employment component from 8 to 3 but the wages component soared from 11 to 20 for an interesting contrast.
The Durable Goods Orders for May declined -1.8% compared to -0.5% in April and consensus estimates for a -0.5% decline. Excluding transportation orders rose +0.5%. The big drag on the headline number came from the transportation sector with a -6.4% decline in orders. That came mostly from a -35.3% drop in aircraft orders. The drop was due to Boeing. They received orders for 60 planes in April and only 11 in May.
New orders are down -2.5% over May 2014 with nondefense capital goods orders down -7.8%. Transportation orders are down -9.6% from a year ago.
These internals helped to depress the market mid morning.
The major report due out on Wednesday is the GDP revision for Q1. Expectations are for a slight improvement from -0.75% to -0.2% but I would not rule out a disappointment.
The Kansas Fed Manufacturing Survey on Thursday is the only other report left this week that could move the market but it would have to be significantly different from the -13 in May. The Kansas survey is in dive mode having fallen from +8 in December to the low of -13 last month. Analysts are blaming the decline on the energy sector and the lack of new orders for equipment used in drilling and producing oil.
The biggest news of the day came after the bell when Netflix (NFLX) announced a 7:1 stock split. With shares just under $700 today that means they would decline to $100 each and allow investors with smaller accounts to participate in the stock's growth. Shares rallied from $681 to $704 after the announcement.
In theory this could be quite a split run since the stock has been rising nonstop since early April. However, some investors could be disappointed because Netflix had enough shares authorized for a 10:1 split and quite a few investors may have been hoping for the bigger split and cheaper shares.
Just yesterday, BTIG raised their price target on Netflix to $950. This is one of those stocks that once split could see a substantial amount of buying interest. The record date is July 2nd and split date July 14th.
The UnderArmour board is not due to approve the UA split until late August and that is the only other currently announced stock that could produce a split run.
Facebook (FB) finally got some traction on the news of a more immersive advertising platform for video. The news allowed Facebook to breakout to a new high on more than twice the daily volume. The company showed off the new advertising platform that will allow short films and pictures to be embedded in the stream of content. Facebook said it will allow advertisers to engage users on a deeper and more personal level than traditional display and banner ads.
Facebook already displays more than 4 billion videos daily. The company also showed a new search feature that was much more comprehensive and broader reaching. They also showed a new pattern recognition feature that can automatically tag people in a Facebook post even if their faces are hidden. Facebook tested the feature on 40,000 public images on Flickr and the algorithm recognized the individuals 83% of the time. The system cues on things like hair, clothing and the shape of people's bodies. Is it my imagination or if Facebook turning into Skynet from the Terminator movies?
The surge in price to a new high also catapulted Facebook into the top ten largest market cap companies in the S&P. Facebook's market cap is now more than $238 billion and a record high. The new market cap knocked Walmart out of the top ten. Who would have ever thought that Facebook would be bigger than Walmart? Of course market cap is a lot different than enterprise value. Walmart has more than 11,000 stores in 28 countries and revenue of nearly $500 billion a year with earnings of nearly $16 billion. Facebook is only expecting revenue of $16 billion and earnings of $6 billion in 2015.
Apparently friends are more valuable than family at least to Mark Zuckerberg. Mark jumped to the world's 11th richest person at $38.6 billion thanks to the spike in Facebook shares today. That puts him only $1.4 billion away from being in the top ten. He jumped ahead of the four Waltons (Walmart heirs) with his $5 billion spike in net worth in 2015. Christy Walton is the richest of the four relatives with $37.1 billion in net worth. According to Bloomberg each of the Waltons has lost $5 billion so far this year. In order for Mark to break into the top ten he will have to surpass Jeff Bezos at $40 billion.
Facebook shares have been slowly edging higher over the last year with $85 as strong resistance. That resistance is history after the breakout today.
Blackberry (BBRY) reported a loss of 5 cents compared to estimates for a loss of 3 cents. However, shares spiked higher at the open on a headline that software sales had risen +150% to $137 million. CEO Chen said he was targeting $600 million in software sales in 2015. He is trying to turn the company from primarily a phone maker into a service company for corporate enterprises.
Blackberry sold one million phones in Q1. Chen was asked if they were going to make an Android version of the Blackberry. He said, "If I can secure Android, I will make an Android phone. If I can't, then I won't." The Blackberry platform is the most secure phone platform in existence today according to Chen.
He also reiterated that Blackberry was not for sale "at this current price." We have put in a lot of hard work and "we are not done yet, not by any stretch of the imagination." Obviously the phrasing left the door open to a sizeable offer. They still have a market cap of $5 billion. Shares are really close to breaking support at $8.75.
Darden Restaurants (DRI) reported earnings of $1.08 on a +13.8% rise in revenue to $1.88 billion. Same store sales at Olive Garden rose +3.4%. Unfortunately the majority of those comp gains came from hiking the prices.
The company saw its entire board replaced last year after the old board sold off the Red Lobster chain against shareholder wishes. Darden said it was going to spinoff 430 of its more than 1,500 stores into a REIT to be complete before year-end. Darden will then lease them back from the REIT. The spinoff will give Darden enough cash to retire more than $1 billion in debt and give them the opportunity to acquire some more stores. Shares rocketed higher at the open but faded to gain only a penny on the day.
Amazon (AMZN) announced a new pay program for authors. For books that are loaned or sold under the Kindle Unlimited program the company will pay authors by the page instead of buy the book. In an effort to slow the flood of inexpensive serial novelettes or just plain crap literature the company is going to pay by how many pages are read rather than by the book. Thankfully, they are not going to pay by the number of pages in the book or we would have thousands of thousand page books to wade through.
By compensating authors by how many pages are read it means the books will have to be more entertaining in order to maintain reader interest. In the old system the authors got the same whether it was a small serial novel that took a month to write or a serious 500 page novel that took years to write. I think this is a good idea because I read about 75 books a year. I have downloaded dozens where I never made it past the first few chapters because the book description was written much better than the book. I just deleted it and went on to something else. Hopefully this payment structure will eventually improve the quality of books on the Amazon website.
In the shortest time span I could imagine Verizon (VZ) has closed its acquisition of AOL (AOL) in only 42 days since the announcement. This is warp speed in the world of acquisitions. According to Dealogic this was the 11th fastest billion-dollar deal closing in 2015. For a list of the top 20 deals this year and their size and speed click HERE. Verizon paid $4.4 billion for AOL. The odds are VERY good we will never see the symbol AOL on a stock again.
Ambarella (AMBA) rebounded +8.4% after multiple analysts called the -$25 drop on Monday a huge buying opportunity. Canaccord Genuity said, "Finally a pullback and a buying opportunity." The company rates Ambarella as a buy with a $115 price target. "We maintain our belief Ambarella's portfolio of highly differentiated application-specific video encode, compression, and analytics processors positions the company for strong sales and earnings growth as HD and Ultra HD video capture and compression become increasingly important across several consumer and enterprise markets."
FBN Securities said the sell off creates a "compelling buying opportunity." They rate the stock a buy with a price target of $110. They also said Ambarella could be an acquisition target by Qualcomm.
Shares declined sharply after short seller Citron called the company ridiculously overpriced. Shares rebounded +$8 today.
On Monday the S&P rebounded on another short squeeze generated by hopes over Greece. However, the S&P only closed ONE point over the closing high for Thursday. The Friday decline was erased but there were no added gains. The Dow also erased its losses but only closed FOUR points over the Thursday close. This was hardly a monster rebound with a lot of buying conviction.
Monday's volume was weak at 5.61 billion shares and today's volume was only 5.64 billion. Advancers were 4:3 over decliners and only slightly below Monday's ratio of 4.5:2.6.
The market opened up sharply with the Dow reaching 18,188 but then faded to negative territory at 18,108 by noon. The S&P rallied only +5 points at the open to 2128 before fading to 2119 and -4 points at noon.
I am boring you with this trivial number listing to show that there was no conviction in either direction. The market is still in wait and see mode over Greece. This is also earnings warning week and S&P Capital IQ is projecting a -4.9% decline in Q2 earnings. This suggests there are plenty of warnings ahead. Lastly, this is the window dressing week. For fund managers that have already dressed up their portfolios their objective now is to keep the stocks and indexes pinned to these levels. They do not care if there are no further gains they just want to try and prevent further declines. This sets up a pretty boring week if they are successful.
However, the major indexes appear to be setting up for a move higher as long as Greek negotiations are successful. Markets hate uncertainty and removing that geopolitical uncertainty would be a relief. I just hope that did not happen on Monday and now we are waiting for a sell the news event.
Resistance at 2129 continues to hold on the S&P but today was the highest close in five weeks. The 2130 level and the historic high close from May is the target and the S&P is inching slowly in that direction.
The Dow chart is very easy to read. The resistance for the last three months is still resistance and every intraday spike is immediately sold. However, today was a four-week high close so point by point we are chipping away at that 18,180 resistance level. There was good participation in the Dow stocks but the leaders were clearly UnitedHealth and Goldman Sachs. Goldman is in breakout mode ahead of the expected rate hikes. UnitedHealth is up on the M&A in the sector.
Note that Apple is near the bottom even with their new music service coming out this week. Investors are favoring biotechs rather than big tech.
The move over 18,100 over the last two days is material. This has been resistance in the past and now it appears to be support. This could be a launching pad on some decent headlines.
The Nasdaq Composite squeezed out another new high at 5160 and it does not appear to be looking back. That was just below the high for the day at 5163, which was a new intraday high.
However, the Nasdaq 100 stalled once again at the resistance at 4545. The big caps are simply getting no love from investors and the broader Composite Index is benefitting from the biotechs and the small caps.
If the NDX can achieve breakout status we could see some short covering to help push the market higher.
The heroes of the market remain the small caps. The Russell 2000 closed at a new high and only 1 point from the intraday high. Multiple analysts are calling 1300 strong resistance and the Russell is only -5 points away. It will be interesting to see if they are right. Remember, next week the bias on the Russell turns positive due to the rebalance purchases. Funds that do not complete their rebalancing by Friday will be adding to positions all week next week in order to get their weightings correct. The majority of the buying will be this Friday at the close but there are always some late comers the following week. Just because the rebalance bias turns positive does not mean the index can't decline. This is a negative bias week and the index is setting new highs so we obviously can't depend on historical trends.
On the negative side the Dow Transports lost momentum again. This was especially troubling since there were multiple upgrades on the airline sector this week. The transports are not confirming decent economic data or the near high on the Dow industrials.
I have been in wait and see mode for the last two weeks with a slightly negative bias. While this week is typically negative for the markets, the potential ending of the uncertainty surrounding Greece has given them a lift. Whether a deal in Greece will lift the markets higher is unknown.
However, the indexes are definitely shifting to a bullish bias and the breakout on the Russell and Nasdaq tell us we should be long. Even the sudden revival of the potential for two rate hikes in 2015 could not slow the market gains.
If the big cap indexes finally gain some traction and move to new highs the resulting rally could be strong. Summer rallies to happen but not often and not normally with big moves. There are always exceptions and I hope this is one for the record books if the breakout occurs.
Enter passively, exit aggressively!
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