A new survey showed major gains by the "leave" the EU faction and with the vote just over a week away, investors bailed on equities.

Market Statistics

Friday Statistics

The new UK survey showed 55% of prospective voters favored leaving the EU while only 45% wanted to stay. This is the biggest percentage spread in favor of leaving and the tide is turning in their favor. The vote on June 23rd is a flashing warning signal on investor calendars but I suspect most really do not have any idea what will happen after the vote.

The vote itself is nonbinding. However, it will express the will of the people and the lawmakers will begin the process to leave the EU if that is how the vote plays out. The UK will have to file an "Article 50" request to exit the EU. That starts a two-year countdown clock that will give officials both in the UK and the other EU countries time to begin making plans for how they will handle business with the UK after their exit.

They will have to decide on passage requirements. Will EU citizens be able to travel into the UK without a visa as they do now? Will British citizens be able to travel to EU countries without a lot of passport problems? How will trade be handled after a UK exit? Currently they have a free trade system within the EU. Will they implement something to continue free trade or will they begin to put up tariff barriers? How will financial companies like banks be able to operate? Will they be restricted to the UK or will they be able to offer services within the EU countries and vice versa. Will companies stop investing and moving into the UK until after the exit in order to have all these problems resolved ahead of time?

The UK leaving the EU is not the biggest problem. The problem will be other countries also planning their exits. France and Italy have already expressed a desire to go back to an independent status. Italy is suffering from the EU rules and wants to go back to its own currency (Lira) and abandon the Euro. Wage and cost inequality between all the Eurozone countries makes it difficult for some countries to compete while others have become trade powerhouses.

Because of the potential follow on effect after a UK exit, the EU ministers are likely to exact a stiff price from the UK in terms of restrictions on travel, trade and financial access. They have to make it so painful that other countries will think long and hard before starting their own exit plans.

The EU experiment is failing for multiple reasons. The common currency prevents countries from issuing new money to combat economic conditions, budget limitations, etc. For a healthy country like Germany, that is not a problem. For countries like France, Italy and Spain, it is a serious problem. Also, the national pride inside each country is slipping because their individuality is becoming blurred. The immigration problem is a challenge where some countries want to halt the hordes at their borders but the EU Ministers want equal opportunity for everyone with open immigration. There are many problems with this failed experiment and most analysts believe it will eventually crumble. The UK exit is the first of several.

For the U.S. markets, I think the immediate impact of the Brexit vote is being over exaggerated. There will be no economic impact to the EU for at least two years. The only impact will be sentiment and how that sentiment impacts the European markets over the next several weeks. Then business will return to normal until the actual exit.

A lot of analysts are expecting the Fed to hold off on a rate hike in June because of the pending vote. I am not sure that is a real excuse. The Fed could use it as an excuse but there are no immediate impacts. I would not be surprised to see a decline ahead of the vote and then a rally afterwards when the world does not come to an end.

In the economic news, the Consumer Sentiment for June dropped slightly from 94.7 to 94.3. The present conditions component rose from 109.9 to 111.7 and a multi-year high. The expectations component declined from 84.9 to 83.2. Presidential elections tend to depress the expectations component with candidates telling everyone how bad things are now and how bad they will be if their opponent is elected. Consumers are not expecting the economy to improve over the next 12 months. The drop in the Nonfarm Payrolls soured some expectations about job availability and salary expectations.

The calendar for next week is very busy with a lot of important reports but the big event will be the FOMC announcement and Yellen press conference on Wednesday afternoon. If they do not hike in June, which nobody expects today, they most certainly will hike in July and Yellen will set the stage for that in her press conference. The data dependent qualifier will be ever present but few actually believe they are watching the data. They want to get several additional hikes completed before the next recession appears. With the IMF lowering global GDP forecasts for 2016 from 2.9% to 2.4% that should be a worry for the Fed.

The challenge is the choppy data and the mixed messages from the regional Fed heads. Hike, don't hike, hike, repeat. Even Yellen cannot seem to make up her mind. Hedgeye had a couple of great cartoons last week.

The Retail Sales for May could be a pothole as well as the Philly Fed Manufacturing Survey on Thursday. Both could be weaker than expected.

This is a quadruple witching expiration so expect early week volatility and high volume on Thr/Fri.

The European markets crashed on the Brexit news and German DAX lost more than 2.5% with the French CAC 40 dropping -2.24%. This carried over into the U.S. markets at the open. With the Dow struggling to break through the 18,000 level for most of the week the weight of the European markets was the news that ended that new high attempt.

The German 10-year bund hit a record low yield of 0.011%. With 23 countries and more than $10 trillion in securities currently holding negative yields it appears the German bund is about to join them. If the bund goes negative, that will create an entirely new round of craziness. This makes the yield on the U.S. ten-year treasury look fantastic. This was also the week that the ECB began buying corporate bonds in volume so there was a serious lack of available paper with any yield.

The yield on the ten-year treasury closed at 1.639% and the lowest close since May of 2013. The flight to safety was very strong on Friday. That is a signal that equities may continue lower in the week ahead.

The dollar soared on the new Brexit survey and the British pound imploded. The stronger dollar was negative for commodities except for gold. The yellow metal participated in the flight to quality trade and closed the day back over $1275. That was a significant improvement from the $1210 from last week before the payroll report.

The chances for a rate hike in June are very low because of the employment report and the Brexit vote. The Fed cannot take a chance that the June employment also crashed and waiting until July is a safe play since they get to see an extra month of economic reports and the uncertainty over Brexit will have passed. The major economists are still mixed over when the Fed will hike with only a few focused on July. Most are looking farther out in the year or even into 2016. The table below shows the economists and their expectations for the Fed's next rate hike.

The CME FedWatch Tool shows that June is only showing a 1.9% chance of a rate hike. It would be a real surprise for the market if a hike appeared and the response could be ugly.

In an interview on Friday Bill Gross warned the $10 trillion in securities with a negative yield was a "supernova" ready to explode. He believes the global move toward negative yields in order to force money into economic investments, will have dire consequences. Gross said "global yields are the lowest in 500 years of recorded history." How that explosion will impact financial instruments is unknown and the subject of numerous scholarly efforts. With central banks buying debt in all forms like there is no tomorrow there will be a climax to this event. Eventually that debt has to be sold back into the market. Even central banks have limits to how much debt they can buy and we may be approaching that point. Japan's central bank is even buying equities and ETFs to push prices higher in hopes of creating a wealth effect in the population in order to stimulate the economy.

The Fed has $4 trillion in treasuries on their balance sheet. This is the largest stimulus program ever and the Fed has never successfully unwound a stimulus program in the past without a major impact to the market. We should not expect them to suddenly be miracle workers and magically make that $4 trillion go away without making ripples. The Fed has said they can let the securities mature rather than put them back into the market. However, the Fed is still taking the proceeds from matured securities and buying more to replace those than mature. Is our economy so weak that we cannot stop those replacements?

If the Fed was so concerned about interest rates, they could stop buying treasuries and real rates would rise. Oh, but they can't because the economy is still limping along at only 0.8% growth in Q1 and only 2.1% average annual growth since the recession. So why are they so fired up about hiking rates? Because they are afraid of a coming recession and they currently only have one bullet (rate hike) they can roll back to stimulate the economy again. Riddle me this: If rates at or near zero are so good for the economy, why has the GDP declined for the last four quarters? You can go crazy trying to unravel all these economic questions and even if you did have the answers you could not convince the Fed you were right. Rant off.

In stock news, Amazon (AMZN) is said to be preparing a standalone music service that could launch later this year for $9.99 a month. This would be separate from the Prime subscription. The Prime subscription already has an extensive catalog of music for those subscribers. The new service could also work with the Echo device to stream music to the home. "Alexa, play Bon Jovi, You Give Love a Bad Name." How much easier could it get? Amazon is reportedly in discussions with the major record labels about access to their songs.

In a separate report, Goldman said Amazon was poised to dominate the apparel market by the end of 2017. According to Goldman Amazon's sales represent 20% of the online market at $10 billion. That is nearly twice what Macy's sells online at $5.2 billion. The report said online sales are expected to continue to grow at the 20% rate but sales at brick and mortar stores are expected to drop off a cliff. Goldman said 35% of millennials purchase their clothing online. "An additional $50 billion in sales will migrate online over the next four years." That is the equivalent of total sales for Macy's, Nordstrom and Kohl's combined.

Separately, William Blair initiated coverage with an outperform.

Tesla shares fell 5% after a bogus report of multiple suspension failures in the Model S vehicle. The report said the National Highway Traffic Safety Administration (NHTSA) had received multiple reports of problems with the Model S suspension. Tesla immediately denied it and by the end of the day, NHTSA had also denied it. The agency said "NHTSA confirmed today that they found no safety concerns with the Model S suspensions and have no need of further data from Tesla."

Apparently, some 40 reports were filed with NHTSA but at least 37 of them were bogus with false identification numbers and locations. The man operating the blog where the initial claim was posted, Edward Niedermeyer, previously ran a blog called "Tesla Death Watch" so his motives certainly seem questionable.

The blog also said Tesla demanded customers sign a Non Disclosure Agreement (NDA) that prohibited them from discussing or reporting the problems to NHTSA. Musk exploded and called that idea "preposterous" and said the "Goodwill Agreement" was only used in rare occasions when Tesla performed out of warranty work for free or at a discount. The form basically says if we fix your car for free you will not turnaround and sue the company or malign the company in the press because of the repair. Musk said he "did not want to do a good deed for a customer and then have that used against us in court for further gain." Musk was openly hostile that someone would file 37 fraudulent reports in order to create a false impression there was a safety issue when none existed. They were obviously attempting to tarnish the brand by making bogus reports and then going public with the claims.

Tesla said it had revised its Goodwill Agreements to make it clear that customers were free to report safety concerns to NHTSA.

The one car that may have stimulated the incident had 70,000 miles and the owner reportedly lived at the end of a long and rocky dirt road. Tesla said the car had seen "heavy use" and it took two wreckers to extract the car from the dirt road. Tesla said that particular car had abnormal rust on the ball joint, likely from the extreme punishment, and something the company had never seen before. However, the customer denied the dirt road claim but admitted it took two wreckers to retrieve the car.

H&R Block (HRB) reported earnings of $3.16 compared to estimates for $3.15. Revenue of $2.3 billion missed estimates for $2.6 billion. They also announced a 2-cent increase in the dividend to 22 cents. They hiked the dividend despite declining revenues and a decline of -4.1% in clients. The CEO said the results were not acceptable and they were committed to improving relationships and rebuilding their client base. Shares rose after they committed to further share buybacks. They bought back 20.5% of their outstanding shares in 2015.

Urban Outfitters (URBN) warned that same store sales are declining by the mid single digits in the current quarter that runs through July. That is not a good sign. The retailer blamed an unseasonably cool spring for the decline. That is interesting since most retailers were blaming warmer than normal temperatures for their sales losses. Whatever you blame it on it is clear that retailers are having a tough time and it does not appear to be improving.

Applied Materials (AMAT) announced a new $2 billion share repurchase program after completing the prior $3 billion program. The company also announced a 10-cent quarterly dividend payable September 15th to holders on August 25th. Shares declined only slightly in the weak market. Adding the two programs together means AMAT will have bought back 20% of the outstanding shares when this program is completed.

Twitter (TWTR) fell below Instagram in advertising interest. A new report from STRATA found 63% of survey respondents plan to advertise on Instagram compared to 56% considering Twitter. That is the first time Instagram has out polled Twitter. The survey said Instagram's agency attention has increased 86% from last year while Twitter's has declined -4%. Facebook is in the top spot with 96% of advertising agencies planning on spending money there.

Twitter also warned users to change their passwords after 33 million were posted as the result of a cyberattack. The hacker, Tessa88, was asking 10 bitcoins for the data or about $6,000. Twitter said they were confident the data advertised was not due to a breach in its systems. If it was not a breach then how did Tessa88 get the information? Did she have an inside agent? Why were they not encrypted? Tesla says the data is probably not valid BUT they are contacting everyone the list and forcing a password change.

Is it just my imagination or is Tom Dorsey going to be awarded the prize for being the first CEO to run two listed companies (TWTR and SQ) into single digits at the same time? Somebody PLEASE buy these companies and turn them around.

Wendy's (WEN) said it found a second case of malware at payment terminals at their restaurants. The malicious software allowed hackers to access the terminals remotely and capture cardholder data as purchases were paid. Originally the company had said only 300 stores were affected. Now they are saying the number affected could be "significantly higher" than 300. Wendy's launched an investigation after numerous complaints of fraudulent charges on customer cards after they ate at Wendy's. Oops!

Eagle Pharmaceuticals (EGRX) rocketed 11% after a patent court validated the patents on Treanda. Teva had already agreed to pay $30 million up front and $90 million in milestone payments, plus royalties on sales of Bendeka. That is a rapid-acting reformulation of Treanda. Treanda had revenues of $741 million in 2015 and Eagle Pharma only had revenues of $14.1 million. That means Eagle should get a windfall out of the patent approval. Eagle only has a PE of 9. As luck would have it, I was stopped out of a call on that dip five days ago.

Walgreens Boots Alliance (WBA) rose +4% and Rite Aid (RAD) gained 3% on news there are signs the FTC will approve the $17 billion acquisition of Rite Aid. The report was in the New York Post and cited "unnamed sources" so I would not count on it happening just yet. Helping the case was the top Pharmacy Benefit Manager (PBM), the CEO at Express Scripts (ESRX), saying he supported the deal. That should reduce concerns about competition being reduced. The CEO said there will still be plenty of competition in the retail sector.

Crude prices rose through Wednesday on more violence in Nigeria and a decline in U.S. inventories of -3.2 million barrels. However, other production is beginning to come back online and U.S. production rose for the first time in 13 weeks. Active rigs also rose for the last two weeks and the first gain since August.

The rebound in the dollar also penalized oil since it would take fewer dollars to buy a barrel of oil. Crude is highly reactive to the dollar because roughly 93 million barrels are produced daily. That is approximately $4.65 billion in oil every day. It is the world's most heavily traded commodity.

Conoco, Shell, Suncor and Imperial Oil have resumed operations after the Canadian wildfire. Cenovus and Canadian Natural Resources still have production offline because of a new fire on June 7th.

Some analysts believe there is a big decline ahead once China completes the filling of its strategic reserves. They imported nearly 800,000 bpd of extra oil in the first quarter as they fill the reserve. So far, they have added 135 million barrels to inventory and they only have storage for 155 million. If they hit capacity in the next 20-30 days there will be an extra 800,000 bpd of oil on the market just as production from some of the other production outages comes back online. With Saudi Arabia, Iraq and Iran all boosting production and U.S. production starting to rise again, we could see prices fall back to the lower $40s by September.

Not everyone is in the same camp. Continental Resources (CLR) CEO Harold Hamm said he expects oil to end the year between $69-$72 per barrel. Way to box yourself in Harold. That is not a lot of wiggle room. He believes global supply and demand have already rebalanced and by Q4 we could see a one million barrel per day shortfall. In 2017, he believes that shortfall will rise to two million barrels per day. I sure hope he is right. Harold, I do not know what you are drinking but please send me some.

Active rigs rose +6 to 414 with oil rigs rising +3 to 328 and gas rigs +3 to 85. That is the second weekly gain for oil rigs and last week was the first gain since August 21st. Offshore rigs were unchanged at 21.


According to the charts, it would appear the S&P failed again at resistance and we can expect a further decline. However, I would caution against using that logic until we see confirmation of a further decline. Headline sell offs like we had on Friday are just like short squeezes. Investors panic, stop losses are hit and that creates a new round of selling and more stops are hit. It becomes a self-fulfilling event. That does not mean it will continue on Monday just like those short squeezes we had in late May completely reversed the following day. I would not be surprised to see the market up on Mon/Tue ahead of the Fed meeting. That is the historical pattern.

Investors will have had time to digest the new Brexit survey and decide they may have been too hasty about their exits. Even if we do go lower, there is decent support at the 2,085 level and that could produce a trading bounce ahead of the Fed. After the Fed and before month end I would bet on a failure of that support.

The S&P broke through the heaviest portion of resistance from 2075-2116 and then stalled. It was though sellers were jumping in ahead of the next level at 2128 in order to get a seat on the downhill express. The high was 2120 and the high close was 2119.

The Dow was a much easier technical story. It failed at 18,000. Period. There were one close slightly above that level at 18,005 but it was immediately erased at the open on Thursday. Friday's decline hit -172 points intraday but recovered to close with a -119 loss at 17,875 and back under resistance at 17,925. If this is a one-day wonder then we will be back fighting that 18,000 level again next week. Otherwise, we could be revisiting the support at 17,700.

The financial stocks, specifically Goldman Sachs, were the biggest weight on the index but the international stocks and commodity stocks were also weak.

The Nasdaq fall from grace was dramatic with a monster gap down open and continued selling all day. The resistance at 4,968 held and support at 4,900 did not. This was a biotech crash. The Biotech Index fell -2.5% on Thursday and -2.4% on Friday. I wrote last week that once the ASCO meeting was over the biotech sector was going to be an anchor for the Nasdaq.

The intraday support at 4,885 was the support from May 25th/26th and it was reasonably solid on Friday. That will be the level to watch on Monday. A decline under 4,885 targets 4,700.

The Russell 2000 fell -1.5% on Friday, also a casualty of the biotech decline. The Russell was also hit by the drop in energy and the financials. Prior resistance at 1,155 could be support. The prior resistance at 1,165 was broken at the close but could still be in play if there is any rebound on Monday. A move under 1,155 targets 1,110.

Historically the market tends to rise on the Tuesday before a Fed decision. Depending on what happens on Monday it will be interesting to see if that trend continues.

The Fed is not likely to raise rates. That means the dollar will weaken and commodity prices should rise and possibly lift the market. That obviously depends on the wording of the Fed statement. "We are not hiking because the economy is weaker than expected and the global uncertainty is lingering. However, it will be appropriate to raise rates in the near term." That is about what I expect them to say. That will immediately make July even more of a live meeting and potentially put a cloud over an already lackluster market heading into the summer doldrums.

Historically the S&P is flat to slightly positive in early June, peaks around option expiration on the 17th and then closes the month at the lows.

I am neutral for next week until we see how the Fed phrases their statement and how the headlines are shaping up for the Brexit vote on the 23rd. If the European markets continue to decline that will weigh on the U.S. markets.

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Random Thoughts

It is best not to pick a fight with a billionaire. The gossip media company Gawker.com is known for the Jezebel and Deadspin blogs and a constant spewing of news that is questionable at best. Several years ago, they outed billionaire Peter Thiel as gay. Thiel quietly joined forces with other targets of Gawker articles and sued the publication. The highest profile suit was the Hulk Hogan sex tape of him having sex with the wife of a friend. Theil paid the legal bills for Hogan and the court awarded Hogan $115 million plus another $25 million in punitive damages.

On Friday, Gawker filed bankruptcy in order to remain a going concern while they appeal that judgment and "a coordinated barrage of lawsuits intended to put the company out of business and deter its writers from offering critical coverage."

Later the announced they had a "stalking horse" bid of $100 million for the business from Ziff Davis publishing. A stalking horse bid is basically an opening bid to establish a bottom price. Later there was some confusion that the Ziff Davis bid was actually less than the reported $100 million. In testimony last year the Gawker founder, Nick Denton, claimed the business was worth $250-$300 million. Hogan's attorneys have already said they plan to press their judgment against whoever ends up owning the carcass of Gawker. The bankruptcy court could reduce the judgment but since it was so high profile and recently litigated, any reduction may be minimal.

The moral to this story is to not make a billionaire mad at you when he can make it his life's goal to put you out of business.

When the S&P closed at 2,119 on Wednesday the volume was a below average 6.4 billion shares. Thursday's weak market that closed slightly lower than Wednesday saw volume of 6.1 billion shares. Friday's market crash only saw volume rise to 6.8 billion shares and about average for a normal day without a market move.

The key here is the lack of conviction in either direction. However, on Friday, the decliners were 4:1 over advancers and there were a lot of stocks with major opening gaps lower that sealed their fate for the entire day. There was no race to the exits. It was only a headline move caused by the new Brexit survey. That could continue on Monday depending on the European markets or it could be instantly erased with another short squeeze.

Despite the market gains early in the week the bullish sentiment declined -2.3%. It is possible the dead stop by the Dow at 18,000 was seen as a problem that eroded sentiment. The survey ends on Wednesdays and that was when the S&P closed at the 2,119 high. Note that bearishness shrank slightly and neutral rose slightly. The weak economic reports could have also been a factor.

The earnings cycle has slowed to a crawl. Ctrip.com, Kroger, Oracle and Smith & Wesson are the only reports that warrant a mention.


Enter passively and exit aggressively!

Jim Brown

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"An economy hampered by restrictive tax rates will never produce enough jobs or enough profits."

John F Kennedy