Greek Referendum: Oxi or Nai?

In the “Beware what you wish for” category, Greek Prime Minister Alexis Tsipiris’ hastily called referendum on whether or not (“Oxi” is "No", “Nai” is "Yes") the country would be willing to accept European demands of more pension cuts, a reduction in government jobs and higher taxes, had clear results: a hefty 60 percent of Greek citizens -- especially younger ones -- voted no, meaning that they simply could not abide more austerity. (Greece's youth unemployment rate has remained at about 50 percent.) [If you need a primer on Greece, check out this 60 second video!] If the referendum was meant to show that Greece was serious and as a result, the European officials would ease up on their demands, Tsipiras was thwarted. If anything, the vote seemed to steel Europeans, who were undeterred by the closure of Greek banks; the imposition of capital controls; a missed IMF payment; and the expiration of the existing bailout.

With the results in, Greece's Finance Minister Yanis Varoufakis said that officials would be heading to Brussels ASAP to restart negotiations, but there's one wrinkly: Eurozone finance ministers are not planning on an emergency meeting tomorrow. German Chancellor Angela Merkel will travel to Paris for talks with France's President Francois Hollande on Monday evening, presumably so that the two largest economies of the euro zone can hash out a game plan.

If/when they do talk, the big question is: Will the Euro group be willing to cede ground and agree to the last deal that Tsipras offered on June 30th? Chances are looking dim for a quick resolution. The BBC reported that German Chancellor Angela Merkel privately told MPs that, as far as she is concerned, Alexis Tsipras has simply driven his country into the wall. Additionally, Senior German Conservative MP Hans Michelbach said "now one has to question whether Greece would not be better off outside the euro-zone." That doesn't sound like the parties will be strumming Kumbaya any time soon.

Yet with little cash on hand, the Greek government is running out of options. Varoufakis told The Telegraph, "Luckily we have six months stocks of oil and four months stocks of pharmaceuticals," but the country still need the European's cash and time is crucial, because Greece must make a $3.9 billion bond payment to the ECB on July 20^th.

If not, the country would no longer be in technical default, it would be in full-fledged default. At that point, the ECB would be hamstrung by its own rules: it can only lend to banks that are solvent and it's hard to say that Greek banks are solvent if the government is not paying its bills. If the NO vote starts a downward spiral towards leaving the Euro zone, Greece will have to create a new currency, which would mean a widespread devaluation of whatever money is left in the Greek banking system and a lot more suffering for the Greek people.

EXPECT A ROCKY START TO TRADING ON MONDAY!!! Almost every large investor that I spoke to over the past week, assured me that a NO vote was "not gonna' happen" and sure it was a risk, "but a very, very long shot risk," against which they would not be trading...

Besides action in Greece and the euro zone, investors return from a long holiday weekend, looking to the release of minutes from the Fed’s last policy meeting. Will the Fed take into account events across the pond? Are they seeing broad-based signs of economic advancement in the U.S.? The last FOMC meeting occurred before the June employment report, which provided a mixed view on the labor market’s progress.

The economy added 223,000 new jobs, making June the 15^th month of the last 16 when the economy has added more than 200,000 jobs. The unemployment rate edged down by two tenths of a percent to 5.3 percent, the lowest level in seven years (April 2008). Unfortunately, the rate dropped for the wrong reason: 432,000 people dropped out of the labor force, which pushed down the labor-force participation rate to 62.6 percent, the lowest reading since October 1977.

It seems that every time there is a good employment report, it is followed by a so-so one. Maybe these kinds of inconsistent results occur when the economy only grows by 2.2 to 2.4 percent for three consecutive years (2012, 2013 and 2014) and is on track for a fourth year of the same. For investors, the negative parts of the labor report might be seen as good news: with a shrinking labor force and wages rising by just 2 percent from a year ago, the Fed may rethink a September rate increase and instead opt for December or even early 2016.

MARKETS: Global markets slid last week, but given events in Greece, there were no apparent signs of contagion—US stocks had one bad day and European stocks are still up 15 percent on the year. Lost in all of the hoopla surrounding Greece was the second-quarter results: The S&P 500 fell 4.8 percent, snapping a nine-quarter winning streak, though that doesn't seem too bad compared to Chinese stock indexes, which have plunged a whopping 30 percent in the past three weeks.

• DJIA: 17,730 down 1.2% on week, down 0.5% YTD
• S&P 500: 2076, down 1.2% on week, up 0.9% YTD
• NASDAQ: 5,009 down 1.4% on week, up 5.8% YTD
• Russell 2000: 1248, down 2.9% on week, up 3.6% YTD
• 10-Year Treasury yield: 2.38% (from 2.47% a week ago)
• August Crude: $56.58, down 4.5% on week
• August Gold: $1,167.60, down 0.8% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.77 (from $2.78 wk ago, $3.66 a year ago)

THE WEEK AHEAD:

Sun 7/5 Greece Referendum

Mon 7/6:

9:45 PMI Services Index

10:00 ISM Non-Mfg Index

Tues 7/7:

8:30 S&P International Trade

10:00 Job Openings and Labor Turnover Survey (JOLTS)

3:00 Consumer Credit

Weds 7/8:

2:00 Federal Reserve Minutes

Thurs 7/9:

Fri 7/10:

12:00 Janet Yellen speaks in Cleveland

Stocks Swoon on Chinese Short Selling Rule

While you were enjoying spring and the NHL playoffs (go ISLES!), Chinese regulators decided that the stock market there is getting a bit too frothy. In fact, the main Chinese stock market index has doubled over the past year, which prompted regulators to make it a bit easier to bet against companies by selling short. Short sellers believe that a company’s stock is overvalued. To profit from that decline, the investor has to borrow a stock that she does not own from a brokerage firm. As an example, if XYZ Corp is currently trading at $100 and you think it’s going down in value, you can borrow the stock at $100 per share from your brokerage firm. With that borrowed stock now in your account, you can sell it for $100, with the expectation that when the stock drops, you can repurchase at a lower level. Let’s assume that you are right and the stock falls to $80, you can pocket the $20 when you return the shares to the brokerage firm.

Now back to that Chinese rule change, which on Friday, sparked fears that investors would immediately enter sell orders in China; and that the selling there would spill over to Europe and the U.S. It should be noted that short selling has been around for a long time here in the U.S. and its presence has not prevented markets from rising. But in a week that lacked any market moving economic reports and it being too early in earnings season to declare victory or defeat, the bears took charge, at least temporarily.

This week, Greece will be front and center, as European officials try to bang out a deal for debt repayments, which are due in May. It will also be a busy week for earnings, with Amazon, Facebook, General Motors, Proctor & Gamble, Boeing and Morgan Stanley reporting. Of the 59 S&P 500 companies that have reported so far, nearly 75 percent have beat profit expectations, but revenues have fallen short, with more than half of companies missing estimates.

MARKETS:

• DJIA: 17,826, down 1.3% on week, up 0.02% YTD
• S&P 500: 2081, down 1% on week, up 1.1% YTD
• NASDAQ: 4,931 up 1.3% on week, up 4.1% YTD
• Russell 2000: 1231, down 1.7% on week, up 3.9% YTD
• 10-Year Treasury yield: 1.85% (from 1.95% a week ago)
• May Crude Oil: $55.74, up 7.9% on week
• June Gold: $1,203.10, down 0.1% on week
• AAA Nat'l avg for gallon of regular Gas: $2.45 (from $2.39 week ago, $3.67 a year ago)

THE WEEK AHEAD:

Mon 4/20:

IBM, Morgan Stanley, Haliburton, Hasbro

Tues 4/21:

Verizon, Yahoo, Yum Brands, Chipotle, Kimberly Clark

Weds 4/22:

Boeing, Coca Cola, McDonald’s, AT&T, Facebook, eBay

9:00 FHFA Home Prices

10:00 Existing Homes

Thurs 4/23:

3M, Amazon, Google, Microsoft, GM, Procter & Gamble, Starbucks, Pandora

10:00 New Home Sales

Fri 4/24:

Biogen, American Airlines

8:30 Durable Goods

Janet Yellen's 7-Year Itch

Are Fed officials getting the seven-year itch? The central bankers have kept short-term interest rates (the federal funds rate) near zero since December 2008. Back then, the economy was reeling from the financial crisis and was one year into what would become the most severe recession since the Great Depression. Slashing interest rates and purchasing bonds were strategies meant to spur lending and stimulate the economy. Fast-forward seven years and the U.S. economy finally is firming -- growth is accelerating to about 3 percent annually and job creation has picked up. The improvement has allowed the Fed to conclude its bond-buying plan and would seem to indicate that ultra-low rates are no longer necessary. But in minutes from the last Fed policy meeting, officials are struggling to agree on the timing and pace of interest-rate increases, not to mention the best way to communicate their intentions to the public.

At issue is the core problem with normalizing monetary policy: waiting too long to increase rates could lead to inflation and/or could create financial asset bubbles, while moving too quickly could snuff out the recovery. With all of the uncertainty swirling, it is great timing that Fed Chairwoman Janet Yellen will testify before Congress this week on the outlook for the economy and monetary policy.

Fed officials and the rest of the investment community were relieved to learn that the Eurozone approved a four-month extension on Greece’s €240 billion ($273 billion) bailout plan, which was set to expire on February 28^th. The Greek government must submit details by Monday on the reform and budgetary measures it plans to take in order to seal the deal. There are some indications that European officials will be a bit more lenient on the terms going forward, but nothing is set in stone yet.

The extension sets up a looming summer deadline, because it will expire before a €7 billion ECB bond repayment is due. Additionally, there is the overarching concern that anything that occurs in the near-term is noise, because few believe that Greece’s debts, worth over 175 percent of GDP, will ever be repaid in full. That’s why there have been more calls for Greece to leave the euro zone -- the so-called “Grexit”.

A Grexit seems far less ominous today than it would have five years ago. But there would be losers, including euro zone countries, which own about 60 percent of Greece’s debt, the IMF, which holds about 10 percent and the ECB has 8 percent and private investors, who hold about 17 percent. And no doubt there would also be a negative market reaction. But with some time, there could be a more thoughtful way to manage the exit process and limit the systemic repercussions.

Finally, get ready for America Saves Week, an annual opportunity for organizations to promote good savings behavior and a chance for individuals to assess their own saving status. Only about half of Americans actually have a savings plan with specific goals, so clearly there’s a long way to go to get people on board with the celebration.

MARKETS: The temporary Greek deal was enough to push the Dow, the S&P 500 and the Russell 2000 to new records, while the NASDAQ inched within 1.9 percent of its all time high of 5,048 reached in March 2000.

• DJIA: 18,140, up 0.7% on week, up 1.8% YTD
• S&P 500: 2110, up 0.6% on week, up 2.5% YTD
• NASDAQ: 4,956 up 1.3% on week, up 4.6% YTD
• Russell 2000: 1231, up 2.2% on week, up 2.3% YTD
• 10-Year Treasury yield: 2.14% (from 2.02% a week ago)
• April Crude Oil: $50.34, down 4.6% on week
• April Gold: $1,204.90, down 1.8% on week
• AAA Nat'l avg for gallon of regular Gas: $2.25 (from $2.17 week ago, $3.39 a year ago)

THE WEEK AHEAD:

Mon 2/23:

8:30 Chicago Fed Nat'l Activity Index

10:00 Existing Home Sales

10:30 Dallas Fed Manufacturing Survey

Tues 2/24:

Home Depot, Hewlett-Packard, Macy's

9:00 Case Shiller Home Price Index

10:00 Consumer Confidence

10:00 Janet Yellen testifies before Senate Banking Committee

Weds 2/25:

10:00 New Home Sales

10:00 Janet Yellen testifies before House Financial Services Committee

Thurs 2/26:

8:30 CPI

8:30 Durable Goods Orders

Fri 2/27:

8:30 Q4 GDP (2^nd estimate)

9:45 Chicago PMI

10:00 Consumer Sentiment

10:00 Pending Home Sales Index