The Greek crisis was quickly winding down to what everyone thought would be a last minute resolution after the EU, ECB and IMF offered Greece a deal that unlocked 15 billion euros in aid. The deadline for acceptance was Sunday evening in order to get parliament approvals before Tuesday's aid expiration deadline. Instead Tsipras invoked the nuclear option to spoil those plans.
Late Saturday EU Finance Ministers were due to meet in Brussels for a last minute attempt to get Alexis Tsipras to accept the offer and end current crisis. The current bailout deal that has seen Greece receive over 300 billion euros in bailout loans expires on Tuesday June 30th. Early Saturday Tsipras made a TV appearance and called for a surprise referendum on July 5th to accept or reject the latest offer. No, you did not misunderstand. The deadline for the deal was midnight on June 30th and Tsipras called the referendum for July 5th. At the same time he called on voters to reject the offer.
Tsipras said, "The Greek government has been asked to accept a proposal that places new unbearable burdens on the Greek people. Right now, we bear an historic responsibility concerning ... the future of our country. And this responsibility obliges us to answer the bailout creditors (EU, ECB, IMF) ultimatum based on the sovereign will of the Greek people." He said the Greek government had already rejected the proposals but because of the severity of the repercussions, he felt obligated to let the people decide for themselves. If the offer is rejected, the Greek banks could close, the Greek government could be forced to print its own money, which would be worthless and it could lead to an exit from the eurozone.
Just when everyone thought there would be a last minute deal to rescue Greece from those problems Tsipras effectively killed that option and is apparently committing country suicide. However, there is a catch. While there have been numerous daily demonstrations demanding he reject the deals there is a quiet segment of the public that does not want the country to be dragged down further and forced to leave the eurozone. Some analysts have said as many as 60% of Greek citizens want to continue using the euro and remain in the eurozone.
It is entirely possible that Tsipras knows this and he is holding the election to pacify the highly vocal minority but expecting the majority to take the matter out of his hands and accept the deal. That way he can say "I tried my best" but the voters spoke and I had to do the will of the voters.
The Saturday headlines mean we are going to have yet another week of uncertainty in the financial markets. Late Saturday the EU Finance Ministers shelved efforts to rescue Greece and turned their attention to controlling the collateral damage from the Tsipras move. Greeks of all classes lined up at ATMs to withdraw as much cash as possible ahead of the possible closure of Greek banks next week. By late Saturday the majority of the 7,000 ATMs in Greece were out of cash. The ECB is expected to pull the plug on the continued assistance to the Greek banks because they have little hope of ever seeing that 89 billion euros again. Monday could be a bank holiday as the government tries to find a way to stave off disaster. Some banks are already limiting the amount of money a customer can withdraw. Serious capital controls will probably be imposed next week. The IMF said the referendum was a waste of time because the proposal expires at midnight on Tuesday.
Some FX brokers have already changed the rules on currency transactions to "close only" in an attempt to prevent huge losses in the currency market. (Mayzus.com) Other brokers (FxPro) has raised the margin requirements to trade EUR currencies in order to provide a safeguard against a highly volatile market. "We also reserve the right to limit orders to closing positions."
To say the markets may be volatile on Monday would be an understatement. This could be a Lehman event for the eurozone.
The U.S. markets were already struggling after the Shanghai Composite declined another -6.4% on Friday and is now down -18% from its high just two weeks ago. Another -2% and it will be in bear market territory.
There were no major economic reports on Friday to move the market. The Consumer Sentiment revision for June was revised higher from 94.6 to 96.1. This is up from a drop from 95.9 to 90.7 in May and completely reverses that drop. January's 98.1 was an 11-year high and we are rapidly moving in that direction again.
The present conditions component surged from 100.8 to 108.9 and the expectations component posted a lesser gain from 84.2 to 87.8. More than 44% of respondents said they were better off now than the same period in 2014. That is up from 41% in May. Sixty-three percent said business conditions were better today than a year ago, up from 56% in May.
The calendar for next week is headlined by the payroll reports and the national ISM Manufacturing Index. The ADP Employment is expected to show just over 200,000 job gains in the private sector. The Nonfarm Payrolls on Friday are expecting a gain of 225,000 jobs. That is well below the 280,000 in May. The odds are very good that May number will be revised lower.
The ISM Manufacturing on Wednesday is expected to show only minimal improvement from the 52.8 headline from May. Recently we have seen some positive gains in the regional manufacturing reports so there is the potential for an upside surprise in the ISM. However, the manufacturing sector is still the weakest part of the economy other than energy and much of the manufacturing weakness is due to the slowdown in the energy sector.
Kroger (KR) joined the stock split calendar last week with the announcement of a 2:1 split. The date of the split is July 13th. The announcement was not expected since the stock was only trading at $72 at the time. Full Split Calendar
There were two big names in the news on Friday. One of those was Nike (NKE). After the close on Thursday Nike reported earnings of 98 cents that easily beat the consensus estimates for 84 cents. Revenue of $7.78 billion also beat estimates for $7.68 billion. Future orders for delivery through November rose +2% to $13.5 billion. Without the impact of the strong dollar those orders would have risen +13%.
On a constant currency basis, sales in North America rose +14%, China +22%, Japan +20%, Western Europe +14% and +17% in Central and Eastern Europe. Those are outstanding numbers. Nike was able to sell even its highest priced shoes. Sales in the current quarter are expected to grow in the low to mid single-digit range compared to estimates for 7.4% gains. The headwind preventing that is the strong dollar. Shares spiked $4.50 on the news and provided nearly 35 points of the Dow's gains.
Foot Locker (FL) and Finish Line (FINL) both spiked higher on the Nike news since they are both big sellers of Nike shoes and apparel. Under Armour (UA) was the laggard since they compete with Nike. However, strong sales of athletic apparel by one company suggests the other will also do well. Under Armour reports earnings on July 23rd.
The other big name was Micron (MU). Shares fell -18% after the company warned of slowing PC demand. The company posted earnings and guidance and they were not good. The company said earnings and revenue fell in the quarter as demand for PCs continued to decline. Earnings of 54 cents missed estimates for 57 cents. Revenue of $3.85 billion missed estimates for $3.9 billion.
They guided for the current quarter to revenue of $3.45 to $3.7 billion and that was well below analyst estimates for $4.16 billion. Micron did say demand could improve later in the year when Windows 10 PCs begin shipping for the holidays.
Micron found no love in the analyst community with 13 firms cutting the price target for Micron shares. The general consensus was to avoid Micron shares until later in the year and not try to catch this falling knife.
Volume of 149 million shares was six times normal.
The Micron warning on PC demand crushed the semiconductor sector with the Semiconductor Index ($SOX) falling -2.45%. Even companies like Ambarella (AMBA) that do not make PC chips were knocked for a loss. Intel lost -3%, PMCS -3.8%, XLNX -2%, etc. The SOX was knocked back to the 150-day average, which has been support on all the major dips since October. You can play the Semiconductor Index with the SMH ETF.
Zoetis (ZTS) probably have the most volatility over the last two days of any stock. On Thursday shares spiked from $49 to $55 on headlines that Valeant Pharmaceuticals (VRX) had made a preliminary approach to buy the animal health company. Zoetis was spun off from Pfizer in 2013 and is one of the largest sellers of vaccines and medicines for livestock and household pets. It had a market cap of roughly $25 billion on Thursday.
Bill Ackman took an 8% stake in the company in November and received a seat on the board. Immediately things began to change. They trimmed workers and closed facilities and improved profitability and cash flow. Ackman also teamed with Sachem Head Capital Management, also a large owner of ZTS shares. Ackman has teamed up with Valeant before in an acquisition attempt of Allergan (AGN). About four weeks ago somebody bought $1.1 million in the October $55 calls and rumors began to swirl that a deal was coming.
However, on Friday shares imploded when analysts began to question the metrics and mechanics of any potential deal. Analysts began to question whether Valeant had even made an offer or just expressed interest to see if they were for sale. The Wall Street Journal, which broke the story, said it was unclear whether Zoetis was even receptive to an offer from the serial acquirer. One positive event was the Wednesday expiration of the tax liabilities of the spinoff from Pfizer two years ago. Any acquisition today would not incur any significant tax liability. Other analysts said at the $55 price of ZTS after the spike on Thursday that was a PE of 29 and the potential for a deal over $55 was slim.
However, given the fact that Ackman is in play and somebody bought $1.1 million of the October $55 calls, possibly him, the odds of a deal price over $55 by October would appear to be a pretty good bet. I doubt Ackman or any other major hedge fund would have bought $55 calls in that quantity if they did not think the final price would not be over $55.
With all the confusion on Friday shares of ZTS collapsed -12% to $48.65. That was a $6 move in alternating directions on back-to-back days.
Netflix (NFLX) was awarded another target price increase from MKM Partners on Friday. Their new target price is now $885 because of the potential for significant upside from growth outside the USA. MKM expects international subscribers to exceed 100 million by 2021. Pay TV subscribers are expected to exceed 1 billion by 2020 but the cost of Pay TV is much higher than Netflix making the streaming company a highly desirable alternative. Shares declined on the post split announcement depression.
BTIG Analyst Richard Greenfield raised his price target to $950 earlier in the week on the same international fundamentals.
With the year half over all the analysts are brushing off their end of year forecasts and deciding if they need updating. Currently with the S&P at 2,101 the average of the top 26 analysts is for a rise to 2,229 by the end of December. That would be a +6% gain from here.
Barclays and Goldman Sachs remain the most bearish with 2,100 price targets. Stifel Nicolaus is the most bullish with 2,375 as a target. The forecasts for S&P earnings have not come down that much but after the Q2 earnings cycle that could happen in a hurry. Q2 earnings are expected to decline -4.3%. The energy sector continues to burn cash and reduce activity so that will be a major drag on the overall earnings totals.
At Friday's close the Dow was up only 0.7% for the year or just barely over breakeven. The S&P was up +2% and the Nasdaq +7%. The Russell 2000 gained +6.2%. The big leader was the biotech sector at +22.5% and the biggest loser was the Transports at -9.8%.
The Russell rebalance happened at the close on Friday and volume of 8.66 billion was nearly 3 billion shares higher than Thursday's 5.8 billion. Volume more than doubled in the final 15 minutes of trading as the portfolio restructuring was completed.
Stocks with active buyback programs saw their weightings in the Russell indexes reduced. Those included companies like Exxon and Apple. Stocks that have been issuing shares saw their weightings increased. Examples would be Hyatt and Facebook.
Overall there were 29 stocks that moved from the Russell 2000 to the Russell 1000 because they grew larger during the last 12 months. There were 50 stocks that moved from the Russell 1000 down to the Russell 2000 because they shrank during the year. There were 120 new stocks added to the Russell 2000 and the equivalent number removed.
Everything went as planned for the traders responsible for the restructuring. The Russell 2000 fluctuated in only a 5 point range from 1:PM until the close and the closer to 4:PM the more stable that range became. It is amazing that the markets can reweight 3,000 stocks in the Russell indexes with volume of nearly 3 billion shares and $50 billion in valuation in the last 30 minutes of trading and not have any material move in the indexes.
The Russell indexes declined for the last three days, which is normal for the rebalance week. The stocks being removed or reduced are still in the index so that produces a negative bias. The stocks to be added are not in the index so their individual moves have no impact on the indexes. That is reversed next week. For those slow pokes that did not get their restructuring done last week the purchases of the stocks being added will impact the indexes next week. This gives the Russell indexes a positive bias for next week.
However, if Greece is going down in flames it will take a lot more than a positive bias on the Russell indexes to rescue the market.
Hindsight is 20:20. If you had bought the Russell 3000 index (IWV) in October 2013 you would have had better than a 50% gain. When you look at the long-term charts the moves are really apparent. Unfortunately, we normally get caught up in the daily moves and lose site of the overall picture.
The volatility in crude oil has completely disappeared. The chart pattern suggests a breakout is coming but that would ignore the seasonal weakness that develops after the July 4th holiday. However, there is a bigger event at play here. The negotiations with Iran are not going well. The artificial deadline of June 30th is here and both sides are locked into positions that are not likely to change. President Obama has said more than once that the deadline is firm and will not be changed again. After all they have been working on this for the last five years. However, deadlines and red lines have been changed in the past so expect some can kicking here.
The problem for the oil sector is the Iranian oil that could hit the market if a deal is reached. Iran could almost immediately increase oil production by about one million barrels per day and drop it into an already flooded market. In addition they have between 30-40 million barrels stored on tankers and ready to be sold the instant the sanctions are lifted. An Iranian deal that removes sanctions is going to be very negative to crude prices.
However, both sides seem to have reached an impasse. Iran said they will not sign a deal that does not remove all sanctions upon signing. The P5+1 nations claim that is not going to happen. Sanctions will only be removed after Iran has complied with its requirements to reduce nuclear enrichment capacity and the amount of enriched uranium they have on hand. Last week Iran's supreme leader, Ayatollah Ali Khamenei vowed Iran would not freeze nuclear enrichment.
The P5+1 nations claim they will not sign any deal that does not include unannounced spot checks on any nuclear facility as well as any military site where inspectors believe nuclear testing has been conducted. Khamenei said under no circumstances would inspectors be allowed spot checks without advance notice and no inspectors would ever be allowed on any military site. Iran's parliament passed a bill last week banning nuclear inspections at any military site.
Rational people would look at the facts and assume a deal is not going to be completed. However, in politics nothing is ever rational and there are always handshake deals that circumvent whatever is actually committed to paper and signed. The president has said there will be by necessity secret components to any Iranian deal and those components will not be disclosed to the press, public or Congress. That suggests the 7 nations can sign/say whatever they want in public because the secret side deals could negate the public documents.
Crude prices are flat lining at $60 while we await the resolution of the Iranian negotiations. With no deal and a breakdown in talks prices could rise sharply. With a deal that removes sanctions prices could decline sharply.
Active rigs rose last week for the first time in 28 weeks. The total number of rigs rose by +2 to 859 but oil rigs continued to decline with -3 to 628. Gas rigs rose +5 to 228 and the highest level in several months. We may be nearing the bottom with active rigs at a ten-year low. The results of the Iranian negotiations and their impact on oil prices could have a dramatic impact on active rigs.
U.S. production of 9.604 million barrels per day was only slightly below the 40 year high of 9.610 mbpd from two weeks ago. Oil production is not declining as many expected and that is confusing to analysts.
The historical trend asserted itself and now we have had 23 out of 26 post expiration weeks in June with a loss. Fortunately, it was not as bad as the historical norm of -1.1% on the Dow. The actual decline of -0.38% is just a hiccup rather than a decline. The near term support is still in place although the internals worsened slightly.
The percentage of S&P stocks under their 200-day average declined to 59.6%. The percentage under the shorter 50-day average declined to 45.4% but that was still an improvement over the prior week. The most bearish chart remains the Bullish Percent Index, which declined to 61.6% after only barely rebounding earlier in the week. This is the equivalent of a slightly longer-term look at stocks because it takes a definite move of several dollars to move a stock in or out of the bullish signal position.
Approximately 45% of S&P stocks are already in a bear market with declines of -20% or more.
The S&P itself made a lower high that could be seen as the right shoulder in a head and shoulders formation. However, the decline on Friday stopped right on the 100-day average and the stronger 150-day was still 20 points lower. The 150-day and the horizontal support at 2078 should contain everything except a significant change in market sentiment. Traders are still in buy the dip mode but the lack of volume signifies lack of conviction.
Too many investors are still holding out in hopes or in fear of a 10% correction or worse. Some are afraid we are approaching a correction and some are hoping we will get one for a buying opportunity. Both camps are not buying stocks for obvious reasons.
The Dow picture did not change. The resistance at 18,165 is still rock solid with support at 17,750. That gives the Dow a big range of more than 400 points to swing without causing any material damage. A quick spin through the charts of all 30 stocks told me nothing had changed. The charts are starting to look a little choppier but about 20 of the 30 stocks still have a longer term downtrend in place.
The Nike gains added about 35 points to the Dow on Friday with McDonalds adding about 12 and 3M adding about 8. That is 55 points and the Dow gained 56 so the other 27 stocks were no help.
Note that Apple, Intel and IBM were the bottom three with Cisco and Microsoft at 5 and 6. The tech sector was hit hard by the Micron warning on slowing PC sales.
The Dow chart is an easy one to trade with the clear resistance at 18,165 and support at 17,750. Buy the dips and sell resistance until one direction wins.
The Nasdaq crashed back under support at 5100 on three days of declines. However, despite the change in direction, the Nasdaq Composite only lost 36 points for the week. Considering it was at a new high on Tuesday, we really cannot complain. There is much stronger support at 5000 and that is still 80 points away. The uptrend remains intact.
The big cap Nasdaq 100 failed right at resistance at 4345 and returned to support at 4485. There was no major change since the big caps have been struggling to move higher for some time. A decline under 4485 should target 4400 and the support from the prior week. With big cap earnings expected to be weak it could be a struggle for the index to move to a new high or even hold its gains.
The Russell 2000 remains the winner. Even with a three-day decline, the index still managed to hold the majority of its gains and remain over 1275. The negative bias caused by the rebalance may have knocked a few points off in the last several days but that should shift to a positive bias next week. I would expect to see new highs if it were not for Greece. With Tsipras committing country suicide with his referendum, we could see some serious negativity next week that could weigh on the markets.
The Dow Transports fell back into correction territory with a decline to a new 7-month low. The railroads are a serious drag and the minor airline bounce did not hold. We could be looking at a retest of the October lows and that would be a major drag on the broader market.
Yields on the ten-year Treasury closed at 2.476% and the highest level since September. Bonds were being sold across the board last week on comments from Fed heads and improving economics. The comments regarding the possibility of two rate hikes in 2015 compared to no hikes expected just a few weeks earlier dramatically changed the outlook for rates. With bonds falling and yields rising we could be seeing the start of the great rotation. If Greece self-destructs next week that should lift bonds once again but that spike will probably be sold.
I am in buy the dip mode this week. If it were not for Greece I would be expecting an early week rebound. Because of the Greek referendum we could see some serious market volatility on Monday. I am hoping U.S. investors have grown so tired of this weekly saga that they ignore the negative headlines but we won't know for sure until Monday.
The FBI and Homeland Security are both issuing warnings for this week because of a significant uptick in ISIS chatter on the internet. ISIS is pushing for all out attacks against infidels everywhere. Because it is also the Ramadan holiday they are promising their legion of wannabe terrorists an extra reward in the afterlife if they die in an attack this week. ISIS leaders have called for a time of "calamity for the infidels." If you are going out this week into areas where there are large crowds I would be especially observant of the people around you. Fireworks shows could be an opportunity because they take place outside in the dark and suspicious people would be harder to spot.
We have been lucky in America and have not had any serious attacks since 9/11. That will not last forever. Have fun but be careful.
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It must be nice to be a billionaire. Alibaba's Jack Ma bought 28,100 acres in the Adirondacks in New York for $23 million. This includes 9 miles of the St Regis River as well as trout streams, ponds and two homes. The property is heavily wooded and Ma says he plans to make it a conservation project and part time personal retreat. Personal Retreat
It was only a year ago on June 29th that ISIS proclaimed itself and announced a caliphate consisting of portions of Syria and Iraq. To celebrate the anniversary of their coming out party they called for violence on a global scale. The ISIS Ramadan message specifically preaches that jihad is 10 times more obligatory during Ramadan and those who die in jihad will be rewarded by Allah ten times as much as during the rest of the year. There will be ISIS supporters who have waited until now to strike in order to get the maximum reward. Those who were tentatively considering an attack will now feel more pressure to actually do it according to national security analyst Ryan Mauro. ISIS has come a long way in only a year. They started out with only 7-10,000 fighters and are now up to 50-60,000 thanks to their highly publicized victories and no concentrated effort to defeat them. According to Google Ramadan is June 17th to July 17th this year.
The U.S. power grid may be the battlefield for the next war. By destroying or disabling only 9 critical substations in the U.S. power grid the entire system would come crashing down and power could be out for up to 18 months. With this kind of information easily obtainable on the internet, it would be absurd to think that terrorists had not at least thought about attacking the electrical grid. The Federal Energy Regulatory Committee (FERC) released a report claiming the power grid could be knocked out for "weeks if not months" by taking out only 9 substations. How hard is that to do? A lone gunman knocked out one substation last year by shooting 17 large transformers with an AK47 type rifle and was gone long before police arrived. Grid Down Easily
The Chinese markets are crashing. Should you buy this dip? Morgan Stanley Says No
The IMF is suddenly a lot more interested in the Federal Reserve and their plans for rate hikes. A couple weeks ago Christine Lagarde told Janet Yellen not to raise rates until mid 2016 because the strong dollar would be a significant drag on the global economy. Now the IMF staff has asked the Fed to "ditch the dots" referring to the dot plot that shows each person's forecast on what interest rates should be for the next two years.
The "dot plot" is confusing and IMF researchers wrote "It is not straightforward to connect the dots to get a coherent vision of the path ahead," the dots "do not provide a clear picture of the Federal Open Market Committee's majority view." A more transparent forecast, prepared by staff and perhaps presented at least as the majority view of the Fed's policy committee, would make the central bank more effective and is "the main next step for modifying the existing framework at the Fed," the IMF researchers wrote. The IMF is not alone. There are plenty of critics of the dot plot. Ditch the Dots
Each dot represents the forecast of one Fed official for anticipated rates for that period. Four dots on the same line represents 4 officials individually projecting the same interest rate for that period.
There was a huge surge in bullish sentiment last week rising 10.1% to 35.6%. Bearish sentiment declined -12.6% to 21.7%. Neutral rose +2.5% to 42.8%. If you were a contrarian investor, the jump in bullish sentiment and decline in bearish sentiment would be a red flag for the market. Bearish sentiment is now well under the long term average of 30.3% and bullish sentiment is surging. It will be interesting to see how the market plays out in relation to this change in sentiment.
The S&P has now gone 174 days without a 5% dip. That is the longest streak since a 219-day streak that ended on February 11th 2004. While that seems like a long streak, there have been 15 longer since 1957. The longest was 409 days that ended on 8/3/1959.
Deutsche Bank said as of May 23rd there had been 916 trading days since the last 10% correction. Fast forwarding to June 26th that number rises to 941 and the third longest streak since the 1950s. It has been more than 3.5 calendar years since the last correction. This is why everyone is so gun shy about going long the market with earnings declining.
The hard deadline of June 30th for a deal with Iran may "slip a few days but we will be close" according to a senior US official. Based on the increasing hard line stance of Iranian politicians the deadline may slip a lot because they are making it harder to agree as each day passes. If there is a deal within a "few days" of June 30th the odds are very good that it will not be a "good" deal.
France is turning into a hard liner on the side of the P6 nations and said this weekend there will be no deal unless three things are accepted by Iran without any qualifications. Those are suspending a majority of uranium enrichment, agreeing to immediate spot inspections of any facility in Iran including military bases as well as questioning of Iranian scientists and no sanctions relief until all of Iran's responsibilities can be verified by inspectors. Iran has said that under no circumstances will those points be accepted.
On Wednesday, five former members of President Obama's inner circle of advisers on Iran wrote an open letter expressing concerns that a pending deal "may fall short of meeting the administration's own standard of a 'good' agreement." Insiders Warning on Bad Deal
The U.S. has prepared a 30,000 pound bomb that could be used against Iran's underground nuclear facilities if the negotiations fail. The Massive Ordnance Penetrator (MOP) can penetrate 60 feet of concrete and 200 feet of earth before exploding. For massively hardened sites like Fordow they are designed to be dropped back to back with the second bomb hitting in the crater of the first bomb for another 200 feet of penetration before setting off an underground earthquake. Massive Ordnance Penetrator
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"Your trading emotions are often a reverse indicator of what you ought to be doing."
John F. Hindelong