Morning in Arizona

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Rainbows over Canyonlands - Dave Stoker

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Monday, July 06, 2015

Greek 'No' Vote, But Many Market Maybe's

Financial Review


DOW – 46 = 17,683
SPX – 8 = 2068
NAS – 17 = 4991
10 YR YLD – .11 = 2.29%
OIL – 4.40 = 52.53
GOLD + 4.10 = 1170.80
SILV + .06 = 15.85

Perhaps you have heard about the big vote in Greece over the weekend. Greeks voted to pay off all of their debt; they put the money in a big wooden horse. They left the horse on the doorstep of the European Central Bank in Brussels. Problem solved.

Actually, Greeks voted ‘No’ in a referendum asking them to accept an international creditor proposal that would have included more austerity reforms. The final tally showed 61% voted “no”; so it was a bit of a landslide. Both the Greek people and their government want to remain within the euro, and it isn’t clear that there is a legal mechanism to kick Greece out of the Eurozone, at least not any time soon.  Of course a Greek exit might not be so bad. If you are an unemployed Greek worker, it really doesn’t matter if you are not being paid in euros or drachmas. Actually, the idea of printing their own currency, even if it is greatly devalued, is probably easier to swallow than the boot to the throat that is austerity. The question is whether the Greeks must leave the euro to have their own currency, or if they can run a parallel currency and still remain in the Eurozone. Don’t put it past the Greeks to fight a form of financial guerilla warfare.

Greek Prime Minister Alexis Tsipras spoke last night, saying that democracy cannot be blackmailed.  “Greeks have made a brave choice and I’m convinced that the mandate is not to clash with Europe,” adding that the question of Greece’s place in Europe should be “off the table completely”.

Depends on whose table. A couple of emergency meetings are now in the works, including an ECB gathering to discuss emergency liquidity assistance and a meeting between Angela Merkel and Francois Hollande that will review the Eurozone’s response to the vote. Merkel is demanding Greece present a proposal for creditors; she says time is running out. Apparently the proposal the Greeks sent on June 30 is not on the table anymore. Meanwhile, Finance Minister Yanis Varoufakis will not be at the table; he is stepping down from his post due to heavy pressure from Greece’s European partners.

The ECB is leaving little doubt about their approach; the beatings will continue until the Greeks collapse. Greek banks will not be getting any more help from the European Central Bank. In an announcement on Monday afternoon, the ECB said it would keep its Emergency Liquidity Assistance, or ELA, to Greece unchanged at levels announced last Monday. That level is believed to be around €89 billion-euro. The problem for Greek banks, as it stands, is that it looks like they are quickly running out of cash, and unless the ECB releases more money to them, the banks will not be able to reopen this week, and the ATMs may run out of cash. Also of note is that the ECB said that it will adjust the haircuts on collateral accepted by the Bank of Greece as part of the ELA. This means, basically, that if the ECB increases the haircuts on collateral accepted by the Bank of Greece, the size of the ELA effectively decreases. If the adjustment is the other way, the ELA is effectively increased in size.

What the rest of Europe doesn’t yet realize is that the entire Eurozone is only as strong as its weakest link, and efforts to punish the Greeks will only backfire on the whole of the Euro Union.

In an interview with German newspaper Die Zeit, French economist Thomas Piketty, the author of “Capitalism in the Twenty-First Century”, said Germany didn’t repay its external debt after World War I nor did it repay debts after World War II and “has no standing to lecture other nations.” Piketty said Germany’s economic miracle after the end of the war is based in part on debt relief, noting that the London Debt Agreement of 1953 forgave 60% of German foreign debt and restructured its internal debts. Piketty says similar steps should be taken now with Greece.

The reaction in the US was muted. Stocks were down initially, then rallied to breakeven, then drifted lower.

The real elephant in the room might be China. Chinese stocks have dropped by 31 percent over the past month, losing more than $3.2 trillion in valuation. That is six times Greece’s entire foreign debt, or 11 years of Greek economic output. 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. Over the weekend, The Securities Association of China announced that 21 of the country’s largest brokerages had agreed to pledge the equivalent of 15 per cent of their net assets, or no less than $26 billion in total, to invest in blue-chip investment stocks. The move represents a massive flow of liquidity into the market that will ultimately find its way to investors so they can undertake a buying binge. In addition to just throwing money at the problem, the Chinese government canned all new stock-market floats. This follows from recent moves to cut interest rates and ease lenders’ capital settings. The trouble is, despite using its well-stocked toolbox, the Chinese government may not necessarily succeed in stabilizing its equity market.

Even after falls of 25 per cent in the past couple of weeks, the Shanghai exchange is still boasting a one-year return of more than 86 per cent. The earnings of Chinese listed companies have not risen 86 per cent this year – thus nor has their real value. Instead, the growth in the Chinese economy has been easing at the same time the stock market was experiencing these gains. Whether the Chinese government’s move represents little more than a padded Band-Aid remains to be seen.

China’s Shanghai Composite finished higher by 2.4% amid a volatile session. The index opened with a gain of more than 8.5% before sliding. Elsewhere, Hong Kong’s Hang Seng dropped 3.2%, as trade entered a technical correction, now 11% off the April high.

Key elements of a nuclear accord between Iran and six world powers fell further into place on Sunday.  U.S. Secretary of State John Kerry warned there were more sticking points that may scuttle the deal and he was prepared to walk away from negotiations if the problems were not resolved by Tuesday. Should sanctions be lifted, Iran would double its oil exports to 2.3 million barrels a day.

Oil production from the Organization of the Petroleum Exporting Countries climbed to its highest monthly level since Aug. 2012. OPEC production in June rose by 170,000 barrels per day from a month earlier, to 31.28 million barrels per day. OPEC is now pumping nearly 1.3 million barrels above its production ceiling of 30 million barrels a day. So, between Greece and China representing possible economic slowdown, plus the prospect of Iran pumping extra supplies, plus the reality of Saudi Arabia actually pumping extra supplies of oil, the price of oil was down almost 8% today; and that should result in savings of 2 cents per gallon in about 6 weeks, maybe.

We don’t know if oil prices will continue to fall but there is a side bet on oil, and that is the Canadian dollar, or the loonie. Hedge funds and other fast money pushed net bets against the loonie to almost-record levels ahead of crude oil’s collapse last year. After the currency and crude oil’s surprising resilience the past few months beat them back, those positions are starting to grow again.

U.S. service companies and other non-manufacturing companies reported that growth picked up slightly in June. The Institute for Supply Management services index rose to 56% in June, compared with May’s reading was 55.7%. Readings over 50% indicate overall expansion.

After weeks of  health insurer merger talks, Aetna has agreed to buy Humana for about $37 billion, or about $230 per share. The deal will see Humana shareholders receive $125 in cash plus Aetna shares for each share held, representing a premium of 23% from July 2nd’s close. Following the merger, Aetna shareholders will own about 74% of the combined company. And the Aetna-Humana deal could pressure other health insurers to merge. Cigna rejected offers from Anthem for as much as $184 a share in cash and stock, citing concerns about governance and management.

Ant Financial, the financial services affiliate of Alibaba, has closed a private placement of shares that values it at more than $50 billion. The so-called Series A round of financing was led by the National Social Security Fund of China, one of the country’s biggest state funds. While a timetable has not yet been revealed for the company’s public listing, Jack Ma has suggested that any IPO would most likely take place in China’s capital markets.

Investors pulled another $3 billion in assets from the Pimco Total Return Fund in June, compared with $2.7 billion the previous month, in another sign the fund is still bleeding since the departure of Bill Gross last fall. On top of cash withdrawals of $5.6 billion in April and $7.3 billion in March, total assets in the fund have now plunged to $102 billion from a peak of $293 billion in April 2013.

Chicago was once home to one of the largest trading pits in the world. Since 1848, the trading pits were the very symbol of the markets. In 1997, there were close to 10,000 traders on the floor in Chicago. It was physical. It was loud. It was total mayhem, as traders yelled out their buy and sell orders. The open outcry trading pits are now a relic, replaced by computers. The Chicago Mercantile Exchange closed the pits today. About a dozen traders donned multi-colored jackets and traded soybeans, more for the show than anything. Then the bell rang, and that was it. The robots win another round.

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