Thursday was a lackluster day in the markets as old news was rehashed repeatedly and a lackluster employment report caused some investors to rethink the economic outlook. Greece is getting ready for their historic vote on Sunday and Europe is waiting to see what they choose.

Market Statistics

Greek PM Alexis Tsipras may be having a change of heart because it looks like the referendum is not going to turn out the way he hoped. With Greece in chaos with the banks closed and credit cards cut off he is not very popular today. The vote is being seen as a vote to stay or leave the eurozone and polling suggests more than 70% of Greek citizens want to remain in the euro. However, the polling for the Sunday referendum is too close to call with the "yes" side only slightly ahead. A poll on Saturday showed 41.7% would vote yes and 41.1% will vote no. As we all know polling of likely voters and the actual vote can produce dramatically different outcomes.

The fear over Greece had subsided on Thursday and trading was mostly just squaring up positions ahead of the weekend. A majority of analysts believe the market will rise next week if the yes side wins. However, that is not the end of the story. The PM will still have to meet with the EU Finance Ministers and work out a resolution to the bailout conditions. Even with a yes mandate behind him analysts expect him to still be obstinate when it comes to hammering out the conditions. The EU still has the upper hand as long as the ECB is not funding Greek banks. That will keep the pressure on at home and make Tsipras a more willing participant.

Let us hope for a vote to stay in the euro and a quick resolution to the bailout conditions so the market can get back to basics as Q2 earnings begin to flow.

Unfortunately late Friday news broke in the Financial Times that Greek banks were planning for the possibility of a "bail-in" by raiding the accounts of depositors. In 2013 Cyprus seized customer funds with a haircut imposed on uninsured deposits over 100,000 euros. With Greek banks closed for a week and on the verge of a financial collapse the plans call for a haircut of "at least" 30% on deposits over 8,000 euros. That means if you had an account with 100,000 euros when the banks closed a week ago, when they finally reopen you will have 70,000 euros. The bail-in would take place as a recapitalization program for the banks once Greece has agreed to a new bailout program with the EU, ECB and IMF. This is not something that is going to happen immediately but obviously it would have to happen before the banks reopened or everyone would attempt to withdraw their funds. Unfortunately, the capital controls are going to prevent that by continuing to restrict transfers and withdrawals for a long time. The Bank of Greece said the country only had enough cash to keep ATMs supplied until Monday and that allows for withdrawals of only 50 euros per day. Banks are down to their last 500 million euros and essential food and medicine will run out within days because of the lack of imports.

On Saturday Greek Finance Minister Yanis Varoufakis called the bail-in report in the Financial Times a "malicious rumor" with a tweet on his account. Twitter is hardly a channel for official news and it is difficult to believe anything Varoufakis or Tsipras say. Varoufakis said he would resign if Greeks voted yes on Sunday. He said, "I will not sign another extend and pretend agreement." Also, "I would rather cut off my own arm than sign an agreement without debt restructuring."

In the U.S. the Nonfarm Payrolls for June showed a gain of +223,000 jobs compared to estimates for 230,000. As estimates and actual go that was very close. However, it was a significant decline from the +280,000 initially reported in May. Also, the May number was revised down -26,000 to 254,000 and the April reading was revised down from 221,000 to 187,000 for a net loss to revisions of -60,000.

The adjusted U3 unemployment rate fell from 5.5% to 5.3% but not because more people were working. The labor force participation rate declined sharply from 62.9% to 62.6% and a post recession low because 432,000 people left the workforce. The more accurate reading of unemployment called the U6 rate rose from +10.4% to 10.8%.

All of the job gains were in the service sector with goods producing sectors adding only 1,000 jobs for the month, down from only 4,000 in May and 16,000 in April.

The average hourly earnings were flat at zero compared to a +0.2% average gain over the last four months and +0.6% n January. Rising wage growth is something the Fed wants to see before they raise rates.

Nearly every analyst said the expected rate hike in September is now off the table thanks to the payroll numbers and some other weak economics. However, there is an 80% chance of a December hike as evidenced by the Fed Funds Futures. The turmoil in Europe over the Greek disaster and the declining economics in China would be accentuated by rates hikes that spiked the dollar.

The Greek disaster is probably the excuse Yellen will use for pushing rate hikes off until 2016. The economy is not strong enough but she will not want to say that. Blaming Greece gives them another 3-6 months.

Factory Orders for May declined -1.0% after a -0.4% decline the prior month. Orders for durable goods were revised down from -1.8% to a -2.2% decline. Nondefense capital goods declined -7.3%. Defense orders showed the only strength at +8.0% but that was a rebound from a steep drop in April.

The economic calendar for next week is really light with only the ISM Nonmanufacturing and FOMC Minutes as highlights. The Wholesale Trade is never a market mover. The minutes will be the high point as analysts search for clues about a possible rate hike date.

The only material stock news on Thursday was mergers and acquisitions in the managed-care space. Centene (CNC) bid $6.3 billion for Health Net (HNT). The Affordable Care Act is expanding state and federally funded Medicaid by the millions as well as Medicare Advantage. That program has seen enrollment triple over the past decade. About 16.8 million people are enrolled in that program, up 1 million over the last year. Centene said Health Net would strengthen its presence in California, the nation's largest Medicaid market, and create a company with more than six million Medicaid members. HNT shares spiked +10% on the news.

On Friday, Aetna (AET) said it was buying Humana (HUM) for $37 billion to create the second largest managed-care company. The merger of the 3rd and 5th largest will put them right behind first place United Health (UNH). The Aetna deal has the same benefits as the CNC/HNT deal. It will greatly enhance Aetna's position in the Medicare Advantage and Medicaid programs. Aetna will pay the equivalent of $230 per share in cash and stock for Humana. The stock of Humana closed at $188 on Thursday before the news on Friday. Aetna shares will also react on Monday.

There has been no resolution in the Anthem offer for Cigna. Anthem offered $47 billion for Cigna (CI) but was rejected. With these offers being concluded for Humana and Health Net I would expect another bid for Cigna soon. Nothing prevents United Health from making a play for one of these companies so it is in their best interest to partner up quick before United comes calling.

Tesla (TSLA) shares jumped +$11 to a ten-month high at $280 after the company reported it delivered 11,507 vehicles in Q2, up 52% from the year ago quarter. That came after breaking the 10,000-car mark in Q1. The company plans to deliver 55,000 cars in 2015. They began the year with 20,000 reservations for the Model X SUV. Tesla plans on beginning deliveries of the Modal X late in Q3 or early in Q4. The prototype of the Model 3 sedan is expected to be released in March with deliveries planned for 2017. The car will have a starting price in the $35,000 range.

The problem Tesla is facing later this year is the actual sales of the Model X. This SUV model has gull wing doors that lift up. While that may have been a cool idea on the drawing board, it does not really work in real life. Most SUVs have a luggage rack on top for extra "stuff" when the family goes on trips/outings. Bikes, snowboards, surf boards, luggage, etc. With gull wing doors that does not work. There is no place to carry extra stuff because the trunk in the front is relatively small and there is no storage in the back. Also, the doors leak in the rain and when covered with heavy snow they cannot be opened. Several analysts believe this is going to lead to a slowdown in sales once these problems become well known. Once the first 10,000 or so hit the streets and complaints start pouring in from people that have not thought about those problem areas, we could see a dry spell between the Model S and the Model 3. With Tesla burning cash at the rate of about $500 million a quarter and $1.9 billion in the bank that means by the end of Q2 2016 they could be out of money. This will be especially true if the Model X falls flat after the first quarter of novelty sales.

Vertex Pharmaceuticals (VRTX) shares were halted most of the day on Thursday. The FDA approved the blockbuster drug for the treatment of cystic fibrosis called Orkambi. This is a drug combination that expands the patient base by about 400% and will generate $5 billion in revenue by 2018. This one drug is expected to turn Vertex profitable within the next three years. Orkambi was priced at $259,000 per year of treatment. That is going to give insurers a nightmare headache.

Biogen (BIIB) and AGTC (AGTC) announced a collaboration agreement to develop gene based therapies for ophthalmic diseases. The partnership will focus on developing a portfolio of therapeutic programs that will prevent blindness in children and adults. AGTC is eligible to receive upfront and milestone payments exceeding $1 billion starting with $472.5 million for the two lead programs and a royalty of up to mid tens percentages on the sales of the drugs. AGTC spiked +17% on the news.

Paypal acquired Xoom Corp for $890 million. This is a digital money transfer company and will complement Paypal's person to person money transfer business. The purchase price was thought to be a bargain and XOOM shares rose +21%.

Western Union (WU) shares fell -7% after Citigroup said the XOOM acquisition was bad news for Western Union.

Yelp (YELP) called off its hunt for a buyer and shares declined -10%. There were multiple bidders but nobody could agree on a price. With Yelp reporting a slowdown in visitor growth from 39% to 13% in Q4 with unique visitors declining for the first time ever the outlook for Yelp is not that positive. The company also lowered guidance so no surprise there were no big offers for Yelp.

Crude oil declined another -1.41 after dropping -2.50 on Wednesday. The unexpected build in crude inventories pushed prices down on Wednesday. Imports also rose to a two-month high of 7.51 million barrels per day. On Thursday, Baker Hughes said the overall active rig count rose +3 but active oil rigs rose +12. That was really unexpected and sent oil sharply lower.

U.S. production was 9.595 mbpd and only 15,000 bpd below the 40-year high set three weeks ago at 9.610 mbpd. Production is not declining and crude prices are falling. This could turn ugly over the next several months as fuel demand declines as summer driving fades.

If Iran and the P5+1 nations were to agree to a deal this week that included the lifting of sanctions it would be very bearish for oil prices. The Iranian Foreign Minister Mohammad Javad Zarif released a YouTube video in English saying negotiators were closer than ever but getting a deal would require "the courage to compromise, the self confidence to be flexible, the maturity to be reasonable and the wisdom to set aside illusions and the audacity to break old habits." Later in the statement he used the word hope in a clear reference to President Obama's book "the Audacity of Hope." The YouTube video was clearly an attempt to pressure the 6-nation team and especially the U.S. negotiators and President Obama. Some analysts perceived the video as a hardening of Iran's position as they tried to portray America as unreasonable and stuck in the past. The odds of a deal are slim and the odds of a deal that instantly remove the sanctions are almost zero.

The International Atomic Energy Agency (IAEA) released a report last week showing that Iran had failed to live up to the requirements of the most recent prior agreement by enriching more uranium than allowed and by failing to convert it into a form that could not be used in a bomb. This report of Iran's continued failure to live up to the terms of any prior agreement is just an example of how they would fail to live up to any future agreement.


The markets collapsed on Monday with the biggest losses of the year on fears over what would happen in Greece. That downdraft priced in those fears and the indexes drifted higher as the week progressed. The major indexes still ended the week with about a -1.5% decline with the exception of the Russell 2000 with a -2.5% decline. This is understandable since the Russell had the best rally over the prior month.

The S&P declined to within 3 points of its 200-day average at 2054 on Tuesday. The rebound found resistance at the 150-day average at 2078, which had been prior support. The S&P closed at 2076 and right under that resistance in preparation for a positive vote out of Greece over the weekend. The market was expecting Greece to vote to stay in the eurozone and investors were planning on a move higher next week.

The rumors about a bail-in haircut for Greek depositors could be overcome by a yes vote or made worse by a no vote. The point to remember is that regardless of the vote there are still days and weeks of uncertainty surrounding the Greek problem.

Investors and analysts alike do not know how this Greek tragedy is going to play out. As long as there is uncertainty, the markets will be volatile.

The market internals are still negative despite the minor rebound from Monday's crash. The percentage of S&P stocks trading under their 200-day average fell to 53.6%. The shorter term reading saw the percentage trading under their 50-day average fall to 27% early in the week but recover slightly to 35% by Thursday. That is still the lowest levels for the year.

The worst chart remains the S&P Bullish Percent Index. The percentage of S&P stocks with a buy signal on the Point and Figure charts declined to 57.6% and the second lowest level in more than 2 years. This chart is telling us the broader market is turning weaker.

Obviously, market conditions brought on by geopolitical headlines can reverse in an instant. In the U.S., we are headed into the Q2 earnings cycle with Alcoa officially kicking off the party on Wednesday. While there are only a few reports this week the pace will pick up significantly the following week. Unfortunately Q2 earnings are expected to see earnings decline -4.3%.

Goldman Sachs (GS) lowered their 2015 S&P earnings estimates from $122 to $112 with the consensus estimate at $119. The trend for earnings is declining and Goldman blamed it on declining revenues. In other words, sales at S&P companies are slowing despite decent job growth. This is one more reason why the Fed is unlikely to hike rates in September.

Analysts tend to go overboard with their earnings and price target corrections. With the consensus for earnings to decline -4.3% there is a good chance they over compensated and actual earnings could surprise to the upside. It will be several weeks before we will know if that is a real possibility.

For next week, the market will depend on the events in Greece but the declining internals will still be an overall drag. For the last three days the number of new 52-week lows have outpaced the number of new highs by about 3:1. That was significantly better than the 7:1 on Monday but still shows a negative trend.

For Monday, initial resistance on the S&P is roughly 2078-2081 followed by 2100. Initial support is around 2070 followed by the 200-day average at 2054.

The Dow is also struggling between recent support and resistance with two attempts to move back over 17,800. Both failed. With the earnings cycle upon us, the early weeks have a lot of Dow components reporting. If there are some positive earnings surprises then the Dow could gain some bullish sentiment. Conversely if there are some earnings misses then the existing weakness in about half of the components could spread.

Support is clearly 17,00 and resistance just below 17,800.

The Nasdaq is still being supported almost entirely by the biotechs. There is a battle being waged around the 4885-5000 level, which returned as support over the last two days. With the semiconductor stocks in decline and anything PC related also weak the Nasdaq is depending on healthcare, pharma and biotechs for support.

Resistance appears to be firm at 5040 but Thursday was a lower high at 5027. Because of the light volume and the Greek vote over the long weekend we really cannot attach too much importance to Thursdays trading.

The Russell 2000 is a point of concern for me. While the other indexes tried to rebound on Thursday the Russell had a definite negative bias and set a new four-week low. This is not a good sign since the Russell should have had a positive bias for the week after the rebalance the prior Friday. The 100-day average is still holding as support but only barely.

The Russell appears to be breaking down and while it was the leader on the way up it can also be the leader on the way back down. Summer is typically a weak period for small cap stocks and we could be seeing the beginning of that trend. I confess I expected it not to start for another couple of weeks.

Support is about 1243 with resistance 1260. The Russell closed right on the 100-day at 1248.

The Dow Transports just keep moving lower with multiple support levels broken and the October low at 7700 the obvious target. As long as the transports continue to weaken it is unlikely the Dow Industrials will mount any credible rally to new highs. This is an anchor for the Dow and the broader markets.

If we had a wish for next week it would look something like this. The Greeks vote yes to remain in the eurozone and accept the austerity demand from the troika. Tsipras would fly to Brussels and sign a new bailout agreement within 48 hours that reopened the ECB support for Greek banks. Greece would disappear from the headlines in time for the market to focus on better than expected Q2 earnings. Unfortunately, we have an almost zero chance of that wish coming true.

Regardless of the vote outcome, Tsipras will continue to be a stumbling block and the EU finance ministers will have to force him into the proverbial corner so tightly that he is forced to agree to their terms. While this is happening the market will remain volatile but not as bad as last Monday unless some new headlines erupt.

I would be cautiously long on any S&P move over 2080 and flat or short under 2050.



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Random Thoughts

Greece is on the verge of a disaster. As of late Saturday night ATMs are now limited to 50 euros instead of 60 because 20 euro notes have disappeared. Only 10-euro notes remain. Gas stations and small businesses have stopped accepting credit cards. With the banks down to 500 million euros any reopening of the banks would see them run out of cash within hours. Prior to the closing Greeks were withdrawing more than 1 billion euros per day. Restaurants are closing because they cannot import food. Manufacturing businesses are closing because they cannot import raw materials. Other businesses are closing because they cannot pay employees because of banking restrictions. This is a real disaster in the making. Greece Economy Shutting Down

This is a really good flow chart on the future for Greece depending on the outcome of the referendum and whether Tsipras remains in power. There is no easy solution. Barclays Big Picture for Greece

Greece owes the ECB roughly 160 billion euros. The ECB only has paid in capital of 8 billion. If Greece were to refuse payment all the eurozone nations would have to put up additional capital to keep the ECB solvent. Despite the fact that each nation has already been forced to contribute billions to the ECB to be transferred to Greece, they would be forced to contribute even more if Greece defaulted. That has got to be a bitter pill to swallow.

Last week the IMF released a document showing a gloomy analysis of Greek finances. The IMF said Greek finances, regardless of the vote, are unsustainable without substantial debt relief. The IMF said Greece would need a minimum of 50 billion euros in aid over the next three years just to keep it afloat and out of default. The IMF said Greece's debt burden of 185% of GDP can only be sustainable if the troika provides considerable extra financing through a mixture of new loans and debt restructuring. Some analysts believe the Greek debt would have to be cut by 75% in order for Greece to be able to continue functioning. The eurozone countries tried to pressure the IMF not to release the report ahead of the vote because it clearly spells out that the troika will have to give Greece more money. Greece Going Further into Debt

June is normally a month when millions of people enter the workforce. School is out and millions of students look for summer work. College graduates flood the market place looking for that first big job. Unfortunately, that did not happen in June. Over 432,000 people left the workforce in June and that was the largest drop in a single month in more than a year. That brought the work force participation rate down to 62.6% and the lowest level since October 1977.

Over the last decade, an average of 1.35 million workers entered the workforce in June. (Not seasonally adjusted)

Bloomberg on Drop in Workforce

China's Shanghai market declined -5.7% on Friday to cap the steepest three-week decline since 1992. The index is now -29% off the peak on June 12th. Chinese shares have lost more than $2.8 trillion in market cap in only three weeks. That is more than ten times the GDP of Greece. Only 39 of the 1,106 stocks in the index were positive on Friday. Regulators have pledged to investigate alleged market manipulation but in reality this is just an example of what happens when new investors leverage themselves as much as possible using margin. Chinese investors have been opening brokerage accounts at the rate of 3 million a week and then going "all in" on the market." Margin lending had risen 500% and that powered the 150% spike in the market.

Sentiment completely reversed its gains from the prior week and went even further into bearish territory. The prior week bullish sentiment spiked +10.1% to 35.6%. Last week it declined -12.9% to only 22.6%. That was the largest one-week decline since May 2013. The prior week bearish sentiment declined -12.6% to 21.7%. Last week bearish sentiment spiked +13.4% to 35.1% for the largest one-week spike since August 2013. Neutral sentiment was almost unchanged with a -0.5% decline to 42.3%.

This is the 14th consecutive week that bullish sentiment has been below its historical average of 38.8%.

The U.S. Intelligence Agency has gone back to the past. Instead of online forms and databases they are going old school and new applicants have to fill out forms on paper instead of computers. This is due to that monster cyber attack on the government database that saw personal information stolen on up to 14 million people.

The hard copies will be sent to the relevant agencies to review. The Office of Personnel Management (OPM) suspended the online system saying it will be offline for 4-6 weeks for "security enhancements." They are also going to hire a cybersecurity advisor to help prevent future intrusions. This is likely to be FireEye (FEYE). Government Going Back to Paper

China's Foreign Ministry expressed anger at the Pentagon on Friday after the updated National Military Strategy update slammed Chinese claims in the South China Sea as "aggressive and inconsistent with international law."

China is building artificial islands in areas where the Philippines, Vietnam, Malaysia, Brunei and Taiwan have conflicting territorial claims. They are building landing strips on the artificial islands as well as gun emplacements. China said the U.S. should abandon its Cold War mentality. The military strategy update was the first since 2011. China Angry about Military Report

Here is a slide show from the Washington Post showing the upgrades to many of the islands from water covered reef to become major harbors and military facilities. Reef Evolution

China passed a major security law last week to make networks and systems "controllable." As a core component all systems must be secure, which nobody really objects to the concept. However, the law would require anyone selling hardware in China to provide the source technical diagrams and flowcharts plus the software source code to prove there were no hidden security bugs in the equipment. Of course this would let China have access to every cutting edge piece of hardware and all the intellectual property associated and within months they could build their own identical equipment. With all the source code they could also create cyber attacks to create intrusions on the original equipment anywhere in the world. China Legislates Intellectual Property Theft


Enter passively and exit aggressively!

Jim Brown

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