Monday, July 6, 2015

Lower markets let by selling in energy stocks

Dow dropped 46, decliners over advancers more than 3-2 & NAZ pulled back 17 (below 5K).  The MLP index fell a big 4+ to the 392s (another multi year low) & the REIT index rose 1+ to over 310.  Junk bond funds were a little lower while Treasuries rose with increasing political uncertainty around the globe.  Oil sank nearly 9% to the 52s (see below) & gold inched higher.

AMJ (ALerian MLP Index tracking fund)








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CLQ15.NYM....Crude Oil Aug 15....52.81 Down ...4.12  (7.2%)

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The Greek Prime Minister was given hours to come up with a plan to keep his country in the euro & stave off economic disaster as citizens suffer under a 2nd week of capital controls.  Adding to the pressure, the ECB made it tougher for Greek banks to access emergency loans.  Angela Merkel said “time is running out,” as she & French pres Hollande responded to the Sun referendum in Greece.  Tsipras has all but run out of chances to reach a deal with creditors, who have insisted on tax hikes & spending cuts as the price for a new bailout of Europe’s most indebted nation.  Greece’s economy is grinding to a halt, with bank closures extended thru Wed to stem deposit withdrawals.  “It will be important tomorrow that the Greek prime minister tells us how this should move forward,” Merkel said in Paris.  “The last offer that we made was a very generous one. On the other hand, Europe can only stand together, if each nation takes on its own responsibility.”  Just after Merkel & Hollande met, the ECB maintained its lifeline to Greek lenders at the prior level, the equivalent of a drip feed.  It also increased the haircuts on collateral pledged against emergency liquidity, raising the discount applied to reflect the dire economic situation.  Greece today made a pre-emptive concession to creditors with the resignation of outspoken Finance Minister Varoufakis, who had clashed repeatedly with his counterparts from other countries.  His replacement, Euclid Tsakalotos, will likely prove less combative in style, although he shares his predecessor’s opposition to austerity measures & has a deep background in Tsipras’s Coalition of the Radical Left (Syriza).  Tsakalotos played a prominent role in the last round of debt talks, which ended abruptly on Jun 27 when Tsipras called the surprise referendum.  Tsipras can now claim a strong domestic mandate to negotiate after the plebiscite, in which 61% voted “no” to the latest creditor proposals.  The endorsement came even after banks had been closed for a week, causing widespread queues at cash machines as Greeks waited to withdraw a daily maximum of  €60 each.  Unless it finds a solution to its cash crunch, Greece could drift toward an exit from the euro area, an outcome that Tsipras & other European leaders say they want to avoid at all costs.  Without funds to pay salaries & allow commerce to occur, the Greek gov could eventually be forced to issue IOUs or some other medium of exchange, which might gradually evolve into a parallel currency.

Greece Given Hours to Save Place in Euro


The ECB reckons Greece’s financial system can survive until at least after the Tues summit of European leaders without an injection of extra liquidity.  The Governing Council may consider keeping the existing €88.6B ($98B) assistance in place long enough to judge if Greece & its creditors can come any closer to agreeing on the country’s debt financing.  The council is due to hold a conference call at 6PM local time.  The ECB may consider evidence of how political discussions are progressing, including a call of euro-region officials taking place before governors are due to talk.  Then the ECB’s bank-supervision arm is scheduled to hold a telephone conference after the Governing Council call.  Following Greek voters’ landslide vote on Sun against bailout terms offered by EU-led creditors, concern among ECB governors that the country will ultimately default & leave the euro.  At the same time, they have so far been unwilling to preempt any political talks.  Euro-area finance ministers will convene tomorrow to prepare for the summit that will take place later on Tues.

ECB Said to See Greek Banks Coping to Wednesday Without More Aid


Growth at US service industries picked up in Jun from a more than one-year low, signaling steady improvement in the biggest part of the economy.  The Institute for Supply Management’s non-manufacturing index increased to 56 from 55.7 the prior month (the weakest since Apr 2014).  A gauge above 50 indicates expansion, & the estimate was 56.4.  Sales & orders advanced last month for service providers such as retailers, restaurants & real estate firms that are enjoying a rebound a consumer spending.  Further gains for these businesses that make up almost 90% of the economy are helping fuel an expansion beset by tepid capital investment & overseas markets.  Arts & entertainment, real estate, & hotels & restaurants led the list of the 15 non-manufacturing industries that reported growth.  Mining was among the 3 that contracted.  “We’re starting to see this slow, steady and incremental growth month over month,” ISM said.  The new orders gauge increased to 58.3 from 57.9 the prior month & the business activity index, which parallels the ISM’s factory production gauge, climbed to 61.5 from 59.5 in May.  A moderate pace of economic growth after a Q1 setback is prompting service industries to slow the pace of hiring.  The measure of employment dropped to 52.7, the lowest level since Jan, from 55.3 in May.  Last week figures showed the ISM’s Jun manufacturing index reached the highest level in 5 months.  A gain in orders indicated US customers are helping fuel factory demand, though stronger business investment will be needed to produce a more pronounced pickup.  This report adds to evidence that household spending may be firming after weakness earlier this year as consumers put paychecks from newly gained jobs to use.  Household purchases increased 0.9% in May, the biggest gain in 6 years, after rising 0.1% in Apr.

Service Industries in U.S. Expanded at Faster Pace in June


Oil prices tumbled their most in 3 months after Greece's rejection of debt bailout terms & China's rolling out of emergency measures to support its stock markets shook global markets.  Adding to the pressure on oil, Iran & global powers were trying to meet a Jul 7 deadline on a nuclear deal, which could bring more supply to the market if sanctions on Iran are eased.  The self-imposed deadline could be extended again.  US crude has fallen 10% in all over 3 straight sessions & Brent over 7% in 2 consecutive days, the biggest rout since Jan. The slump brought oil out of its narrow trading band of the past 3 months, risking a deeper slide ahead.  A dispute over UN sanctions on Iran's ballistic missile program & a broader arms embargo were among issues holding up a nuclear deal between Iran & 6 world powers.  Iran is seeking to restore oil exports that have dropped from 2½M barrels per day in 2011 to about 1M bpd in 2014.  Oil prices were also weighed down by signs that US shale drillers were returning to the field, as the rig count for oil rose last week for the first time since Dec.  It is unclear whether the latest price decline will give drillers pause, though, as many oil producers had been counting on $60-65 a barrel prices to support new wells.

Oil Prices Sink on Greece and China Turmoil


It could have been worse.  There was some buying in US markets after a major sell-off before markets opened.  Dow finished not far off the highs.  But this remains an ugly situation where euro leaders are making it up as they go along.  Adding to global troubles, oil may be heading back to test its lows in the mid 45s with the possibility of increased oil production from Iran & US oil shale.  These are not times for timid investors.

Dow Jones Industrials











Markets pares early losses after Greek vote

Dow dropped 67 (after paring earlier losses), decliners over advancers 2-1 & NAZ fell 14.  The MLP index lost 3+ to the 393s (multi year lows) & the REIT index was off fractionally in the 308s.  Junk bond funds declined & Treasuries gained as stocks were sold.  Oil sank to the 54s on chaos in the intl markets while gold did little.

AMJ (Alerian MLP Index tracking fund)


CLQ15.NYM...Crude Oil Aug 15...54.44 Down ....2.49  (4.4%)

GCN15.CMX...Gold Jul 15........1,163.50 Up ...0.50 (0.0%)











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Greek voters delivered a decisive verdict on proposals put forward by intl creditors.  In the Sun referendum, 61% of voters backed Tsipras’s rejection of further spending cuts & tax increases in a Greek referendum.  There was 62.5% turnout of 9.86M registered voters.  Emergency negotiations start again this week.  Euro-area leaders are set to meet tomorrow, & things will get started today beginning with conference calls among the European players.  European Commission pres Jean-Claude Juncker was set to hold a conference with ECB head Mario Draghi & Jeroen Dijsselbloem, who heads the Eurogroup of euro-area finance chiefs.  Angela Merkel will meet French pres Hollande this evening.  The ECB Governing Council is also due to talk, with a decision pending on what to do about Greek banks given the increased risk of default.  Euro-area finance ministers are slated to meet tomorrow in Brussels.  On the Greek side, Tsipras will need to find a replacement for Finance Minister Varoufakis, who resigned.  He’ll also have to decide what to do about the banks, which were shut all last week.  Greece won’t leave the euro overnight, but may face face 3-4 weeks of increasing pressure to start printing its own money.  That’s because Greek banks might soon be unable to meet ECB demands for the collateral needed to keep access to Emergency Liquidity Assistance, & the Greek gov would run out of cash to pay its bills & workers.  At that point, it would be Greece’s decision to back out of the currency bloc.  The ECB probably won’t withdraw its support until after the euro area’s political leaders have made up their minds.  That process won’t end before tomorrow's summit, & might drag on for weeks.  Instead, the institution’s bank supervision arm will decide how to value the gov-backed assets held on Greek banks’ balance sheets.  Meanwhile, the central bank’s monetary policy arm will consider whether to object to collateral that lenders post to gain ELA access from the Bank of Greece.  Then, the banks would get calls for new collateral and might come up short.  Taken together, the supervisory & ELA review could show the Greek banks to be insolvent, & Greece wouldn’t have the means to use €s to prop them up again.  The ECB’s Governing Council has declared it will work closely with the Bank of Greece to maintain financial stability.

Greeks Say ‘No’ in Referendum: Now What?


Leveraged bets on Chinese stocks have increased to a record versus the size of the market as prices fall faster than margin traders cut positions.  The outstanding balance of margin loans on the Shanghai & Shenzhen stock exchanges climbed to 4.4% of overall market capitalization on Thurs from 3.6% on Jun 12 (when the market peaked).  Unregulated borrowing could increase the debt to market cap ratio to more than 9%.  Higher leverage may undermine gov measures to stem the steepest 3-week rout in in a qtr-century.  Margin traders reduced positions for 9 days thru Thurs, the longest stretch of declines on record, even as the central bank cut interest rates & the securities regulator eased margin-trading rules.  A 5X surge in leveraged wagers had helped propel the Shanghai Composite Index index to a more than 150% gain in the 12 months thru Jun 12.  The equity gauge rose 2.4% at the close today, paring a 7.8% gain at the open.

China’s Stock Plunge Leaves Market More Leveraged Than Ever


The US & Iran hold the key to a nuclear accord between world powers & the Persian Gulf nation, China’s Foreign Minister Wang Yi said, 36 hours before the latest deadline is set to expire.  Wang & top diplomats from France, Germany, Russia & the UK joined the negotiations on their 10th day.  Diplomats who have given themselves until tomorrow to strike a deal may need an additional day or 2 to draft it, Iranian officials said.  “The comprehensive agreement is within reach,” Wang told reporters.  “What’s important is that today and tomorrow all parties -- especially the United States and Iran -- should make the final decisions as quickly as possible.”  After almost 2 years of negotiation, diplomats are closer to sealing an accord that would return energy-rich Iran to world markets while giving regional rivals guarantees that the Islamic Republic’s nuclear work can’t be used to make weapons.  While progress continues to be made, “we are not yet where we need to be on several of the most difficult issues,” John Kerry told reporters.  Among the most contentious issues are the pace of sanctions relief & the lifetime of the “snap-back” mechanism to reimpose sanctions should an accord be violated.  Ultimately Iran hopes to see a large part of its $100B in frozen assets abroad returned.  Much of the past week has involved discussions with International Atomic Energy Agency.  While the IAEA isn’t formally a party to the negotiations, it will play a key role in implementing a final accord.

China Urges U.S.-Iran Compromise 36 Hours to Atomic Deadline


Chaos reigns on the intl scene.  Euro officials will have to make it up on what to do next about Greek debt.  Confusion reigns, what else is there to say?  The crash in the Chinese stock market with the outlook for more selling is very discouraging.  Speaking about making it up as we go along, the talks about Iran's nuclear work is another mess.  Besides the nuclear issues, Iran is hoping to have a huge amount of money unfrozen.  After month of negotiations, that is still stuck in the mud.  There is plenty for the stock market to worry about, but losses on the Dow have been pared from down 200 when Asian markets opened last night.  However Dow remains on defense with the sellers in command.

Dow Jones Industrials