Tuesday, July 7, 2015

The Morning Call---One more last chance

The Morning Call


The Market

The indices (DJIA 17683, S&P 2068) retreated yesterday on the news of a Greek No vote---but not much.   Both finished below its 100 day moving average.  In addition, the Dow once again closed below the lower boundary of its intermediate term uptrend; if it remains below this trend line through the close on Thursday, the trend will be negated.  The S&P closed above the lower boundary of its short term uptrend. 

Longer term, the Averages are in uptrends across all timeframes: short term (17505-20311, 2064-3043), intermediate term (17706-23848, 1856-2624) and long term (5369-19175, 797-2138).  

Volume increased slightly; breadth was negative.  The VIX rose, ending above its 100 day moving average and within a short term trading range and an intermediate term downtrend.

Not surprisingly, the long Treasury lifted (safe haven), closing below its 100 day moving average and the upper boundary of its short term downtrend.  However, it broke above the upper boundary of its very short term downtrend; if it trades above this boundary through the close on today, the trend will be negated. 

GLD edged higher; but certainly didn’t trade like a safe haven.  It finished below its 100 day moving average and the neckline of the head and shoulders formation.  The dollar also rose slightly, but, like gold, didn’t demonstrate any characteristics of a safe haven.  Oil got hammered on the prospects of a US/Iranian nuke deal (meaning lifting sanctions and therefore, renewed exports of Iranian oil).

Bottom line: after some initial weakness, the indices basically yawned at the Greek No vote.  I am not sure I agree with that judgment; but it is pointless to argue with price.  Given that response and assuming all other things are equal, I would expect the Averages to take another run at their highs. 

But all other things aren’t equal; specifically, the turmoil in the Chinese securities markets is causing some investor heartburn.  Plus, the indices have suffered some technical damage, particularly they have been unable to regain their 100 day moving averages---which I have often pointed out had offered strong support in the preceding two years. 

So right now, the Averages are in very short term downtrends and below those 100 day moving averages which have to be honored until they are successfully challenged. 


            Yesterday’s US economic news was mixed to slightly negative: the June PMI services index was below estimates while the ISM nonmanufacturing index was in line.  (as an aside, this follows an evenly balanced data flow last week).  So the stats continue to support our forecast.

            Overseas, May German factory orders were disappointing.  Not what we want to see from the strongest economy in an EU that is supposed to be recovering.

            ***overnight, June UK manufacturing came in below estimates while industrial production was above.

            Once again though the headlines were dominated by Greece, specifically the surprising strong Sunday No vote on the last Troika bail out offer.  At the moment, everybody is meeting everybody else trying to figure out what to do next.  In other words, the eurocrats are still working on a new ‘kick the can down the road’ strategy.  So this story isn’t over.  But once again the probability of disruptions from a default or Grexit seem to have inched higher.  Ratching up that likelihood, yesterday the ECB raised the ‘haircut’ Greek banks must take on the assets they pledge as collateral (short):

Nevertheless, there remains several possible outcomes each of which has a number of conceivable consequences---all of which are now subject to some pretty intense ongoing debate.  Rather than dealing with all the alternatives myself, I offer the following discussions by experts well above my pay grade.

            Mohamed El Erian on Greece (medium):

            Stratfor on Greece (medium):

            Naked Capitalism on Greece (which has been more right than most through this crisis---medium):

            Barry Ritholtz on Greece (must read)

            A reminder of what happened in Cyprus (medium):

            ***overnight, Tsipras is making what may be his last set of proposals for a bail out (medium):

            Also weighing on investors’ minds is the present mayhem in the Chinese stock market.  Because the Chinese own the vast majority of the shares experiencing the turbulence, there is limited impact on investors outside of that country.  So in that sense, there is little danger of a direct spill over into other markets.   However, there are macroeconomic consequences should this market suffer a severe selloff---and that is where the spill over impact comes.  That is, a significant economic slowdown resulting from severe capital losses could influence global growth.

            More on the financial (market) problems in China (medium):

            And (medium):

            Who gets hurt, or not? (short):

            China bans stock selling by pension plans (medium):

            ***overnight, despite efforts by the Chinese government to prop up the stock market, it is off again today.

Bottom line: the Greek NO vote, eliminated one unknown but simply opened up more possible unknowns.  So my bottom line here hasn’t changed: I don’t know how this ends and I don’t know what it means for the markets if it ends badly; but I do believe that there will be unintended consequences; and since those are by definition unknowable, this situation demands some caution.  

Of course, if Monday’s pin action is any guide, the Market was essentially unphased by the Greek vote.  That in turn suggests all the possible bad news on this situation has been discounted.  And it may.  However, just because everyone is yakking about a problem doesn’t mean that its consequences are properly reflected in prices.  Nor does it mean that in evaluating the likely outcomes, investors won’t began to question their perspective on current stock valuations.

In other words, the outcome of the current Greek crisis may not be terribly impactful from an economic point of view.  And indeed, it may have little effect on stock prices.  However, given the present extraordinary gap between current prices and historical valuation metrics, I believe that some incident or number ultimately will result in an ‘emperor’s new clothes’ moment that leads to the recognition of the aforementioned gap. While that doesn’t mean that a Greek default or Grexit triggers that ‘new clothes’ moment, it also doesn’t’ mean that it won’t.

            Too late for the Fed to raise rates? (medium):

   This Week’s Data

            The June PMI services index was reported at 54.8 versus expectations of 55.1.

            The June ISM nonmanufacturing index came in at 56.0, in line.

            The May US trade deficit was $41.9 billion versus estimates of $42.7 billion.




  International War Against Radical Islam

            Update on the US/Iranian nuke talks (medium):

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