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Friday, July 10, 2015

Markets Were Full Of Sound And Fury, Signifying ... Not Much?

Financial Review

Sound and Fury

DOW + 211 = 17,760
SPX + 25 = 2076
NAS + 75 = 4997
10 YR YLD + .11 = 2.41%
OIL + .04 = 52.82
GOLD + 3.50 = 1163.80
SILV + .23 = 15.72

For the week, the Dow rose 0.17 percent while the S&P fell 0.01 percent and the Nasdaq ended down 0.23 percent in its third straight weekly decline. The markets were full of sound and fury, signifying nothing, perhaps.

Greece faces a Sunday deadline to reach a deal with its creditors. Yesterday, Greek Prime Minister Alexis Tsipras submitted a proposal that appears to meet most creditor demands in exchange for a new €53 billion-euro bailout. The package of spending cuts, pension savings and tax increases almost mirrors that from creditors on June 26, which was rejected by Greek voters in a July 5 referendum. Eurozone decision makers are set to assess the plan during crisis meetings on Saturday and Sunday. Meanwhile, Tsipras took the proposal to the Greek parliament to see if they will stand behind the deal. Outside, anti-austerity protestors rallied against the deal; which makes sense; last week a strong majority voted against the very type of deal Tsipras is now trying to sell. The Greek blueprint for pension cuts and VAT increases is essentially copied word-for-word from the June 24 European proposal; it does not appear to include debt relief. The unsustainable Greek debt from 2 weeks ago still seems unsustainable today.

The euro and stocks surged on the prospect of a resolution to end a near-six-month standoff. We are still waiting to see if this deal will stick with the IMF, the ECB, the Greek parliament, the Greek people, and of course, the Germans. And even if a deal is struck, the bigger question is whether Greece will be able to pull itself out of economic decline. But for now, movement. We’ll have to wait and see if that movement equates to progress.

Chinese stocks rose sharply for a second day today. Chinese Regulators ordered listed companies to submit plans to stabilize their stock prices, via measures such as share buybacks and employee shareholding plans. However, it still remains to be seen whether the rally can overcome the steep declines that wiped out $3.9 trillion in value from Chinese equities over the past four weeks. The Shanghai Composite closed up 4.6% (although it’s still off 25% from its June high).

So, Greece might be nearing a deal and China bounces back with 2 days of solid gains following a month long meltdown. Everything is coming up roses. Not so fast. The Greek deal could still fall apart or if they take the deal, Greece could fall apart; for all we know, Tsipras may have just destroyed Greece and the Eurozone. Chinese markets could still stumble and crash and bring down much of Asia as they fall. Or not. Even if we get past both of these problems, it will likely take some time to work through details and mop up excesses. The global system has the ability to manage through each of these shocks, though not without some stress. It could even handle them both together, provided nothing else goes wrong. Yet success is not guaranteed. It requires much better coordinated and more comprehensive policy responses. And should such responses continue to struggle, asset prices will converge down towards the lower levels warranted by fundamentals

Federal Reserve Chair Janet Yellen deliver a speech today in Cleveland. Yellen maintained her call for an interest rate increase this year, saying: “I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy.” Yellen said the job market had not fully recovered but the overall assessment of the economy was upbeat. She made no mention of China in her speech, and only a passing reference to Greece. Absent an unexpected meltdown, Yellen was prepping the markets for a rate hike.

Kansas City Fed President Esther George spoke yesterday, saying: improvement in the job market and stable inflation suggest that “modestly higher” short-term interest rates are appropriate, and “Economic trends and experience suggest…we would be wise to act modestly but act now.”

The Commerce Department reports that wholesale inventories rose 0.8% in May.  Inventories of durable goods, such as autos and machinery, increased 0.6%. Meanwhile, inventories of nondurable goods rose 1.2%. Wholesale sales rose 0.3% in May, following growth of 1.7% in April. At May’s sales pace, the inventory-to-sales ratio remained at 1.29.

The International Energy Agency has warned in its widely followed monthly report that the rebalancing of the oil market that started last year has yet to run its course and a bottom in prices “may still be ahead”, because the world remains “massively oversupplied.” In its first oil-consumption assessment for next year, the IEA, which advises industrialized nations on their energy policies, said global oil demand growth is forecast to slow to 1.2 million barrels a day in 2016. That compares with an average 1.4 million barrels a day this year.  In a bearish assessment of market conditions, the IEA said the adjustment process would “extend well into 2016″.

IDC estimates global PC shipments fell to 66.1 million in the second quarter; that follows a 6.7% drop in PC sales in the first quarter.  Gartner is offering their own analysis, estimating shipments fell 9.5% to 68.4 million. Factors blamed for the decline: Inventory reductions ahead of the Windows 10 launch (set for July 29), a strong dollar (which has led to higher overseas prices), and the end of Windows XP support.

Apple’s Mac continues to be one of the few bright spots in the PC industry. Mac shipments reached 5.1 million during the second quarter, representing 16% year-over-year growth. Apple was the only of IDC’s top six global PC makers to grow shipments last quarter. The global leader in the PC world is…Lenovo, with a 20% market share.

U.S. quarterly earnings season kicked off earlier this week, with Pepsi and Alcoa reporting better-than- expected sales. However, corporate earnings are estimated to have fallen 3.1 percent in the second quarter, according to Thomson Reuters data.

Investors poured $14.1 billion into stock funds in the past week, according to tracking firm Lipper. This marks the biggest inflows since mid-December. The inflows were the first in three weeks. Funds that specialize in U.S. shares attracted most of the new cash, at $12.6 billion, while funds that specialize in foreign shares attracted $1.6 billion to reverse the prior week’s $1.1 billion in outflows.

The NYSE shutdown this week was probably just a glitch. When trading shutdown for 3 hours, it generated all kinds of cyberterrorism, hacky kind of conspiracy theories. It happened on the same day as United Airlines suffered a glitch, and those hundreds of grounded flights are most likely a preview of things to come. As airlines switch to electronic luggage tags and more travelers swap paper tickets for boarding passes stored on smartphones, industry consultants say the impact of technology disruptions will keep growing. The airlines are just a big flying computer. It was most likely just a software glitch. The problem is that software now runs the world, and that software was built fast and cheap; and it has been patched over and over and over.

Our dominant operating systems, our way of working, and our common approach to developing, auditing and debugging software, and spending (or not) money on its maintenance, has not yet reached the requirements of the 21st century. You know we have infrastructure problems; failing bridges, dangerous railroad intersections, potholes, crumbling water pipes. Turns out, our cyber-infrastructure is also a mess. And we are on the verge of transitioning to the “internet of things”; which is kind of like building a high rise on top of a Quonset hut. The NYSE shutdown this week was probably just a glitch, which is really, really scary.

Checking in on the Libor trial in London, former UBS and Citigroup trader Tom Hayes has been testifying that he was open about his attempts to influence rates and that his managers were aware of it and that the practice was widespread in the industry. Hayes said he had been made a scapegoat to protect more senior figures, accusing UBS of “sheer hypocrisy” for disowning him when regulators got involved, even though senior managers at the bank had known all about his trading practices.
Checking in on Eric Holder, the former US Attorney General has landed on his feet; actually he landed back at his old job at Covington & Burling, a high powered law firm that regularly represents some of the biggest financial firms in the country; he even landed back in his old office, which the firm kept empty, waiting for his return. Holder will settle into a $2.5 million a year contract; not bad for a guy who could not get a single conviction in court for any crimes related to the financial crisis.

Right now a piano-sized spacecraft is barreling through space at over 36,000 mph. The target is Pluto. So far the New Horizons spacecraft has traveled nearly 3 billion miles. This week it got close, by space standards, just a few million miles away; which was close enough to snap a few good photos. The new pictures show some details we have never seen before. Pluto has distinctive contrasting dark and light colors on its surface. A large light colored region, about 1,000 miles across, is kind of shaped like an enormous heart.  NASA has carefully calibrated the spacecraft to fly within 7,600 miles of Pluto on Tuesday. The spacecraft should be able to tell if there are impact craters on Pluto’s moon, and close enough to take detailed pictures of something the size of a football field; just in case someone is playing football on Pluto.

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