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Rainbows over Canyonlands - Dave Stoker

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Wednesday, July 01, 2015

The Greek Unknown

Financial Review

The Greek Unknown

DOW + 138 = 17,757
SPX + 14 = 2077
NAS + 26 = 5013
10 YR YLD + .09 = 2.42%
OIL – .02 = 56.94
GOLD – 4.30 = 1169.30
SILV – .12 = 15.65

Let’s start today with some economic data. ADP reports private-sector hiring picked up in June, as employers added 237,000 jobs. The monthly jobs report from the Labor Department will be released tomorrow; it includes private sector plus government jobs. The consensus guestimate is for about 225,000 new jobs last month.

Construction spending rose 0.8% in May to a seasonally adjusted $1.04 trillion. Spending rose 0.3% for residential projects, and 1.5% for nonresidential projects. The Commerce Department revised April’s result to 2.1%.

Manufacturers grew in June at the fastest rate since the start of 2015. The Institute for Supply Management said its manufacturing index rose to 53.5% last month from 52.8% in May, matching its highest level of this year. Readings over 50% indicate more companies are expanding instead of shrinking. The employment gauge jumped 3.8 points to 55.5%. The ISM’s new-orders index edged up to 56.0% from 55.8%.

The second and final Markit reading of U.S. manufacturing conditions in June was revised up to 53.6 from a preliminary 53.4, but the index was still at its lowest level since October 2013.

Overnight, Greece defaulted on its $1.8 billion debt payment to the IMF. That failure means the Greek bailout package has expired. But markets rallied this morning on reports that Greek Prime Minister Alexis Tsipras, in a letter to the country’s creditors, said he was willing to accept the terms presented in a proposal made at the weekend as the basis for more talks. For now, the July 5 referendum is still scheduled, even though the terms to be voted on have been taken off the negotiating table. And then Tsipras addressed the Greek nation saying they should vote no on the referendum, so it doesn’t sound like Tsipras made any real concessions.

European stocks and bonds rose today. The Stoxx Europe 600 index rallied 2.2 percent. Yields on debt from Italy, Spain and Portugal all fell and the euro weakened 0.8 percent to below $1.106.

Now, we hear a lot of speculation about how the Greeks will vote on the referendum on Sunday. The simple answer is that we don’t know. A poll released today shows 47% to 43% in favor of a “Yes” vote; but keep in mind the polling was done by a German polling company.  The referendum was thrown together so fast that there hasn’t been anything that could be considered reliable polling to tell us how the vote will play out. If anyone speculates, it is just that – speculation. Beyond that, we don’t know the consequences. I have heard reports that if Greece votes no, they will be kicked out of the Eurozone. Not so fast.

From a legal standpoint Greece would still be a member of the European Union; even if they start printing drachmas. Greece might want to take control of its own monetary policy and not be bound to contracts denominated in euros. Even if a country violates the treaty, there’s no mechanism for kicking it out. That would create a host of legal and administrative headaches for both Athens and Brussels. Trouble is, there’s no clear legal path for a country to exit the Eurozone without leaving the EU first. EU treaties describe the Eurozone as “irrevocable.” A country can leave the EU, however. Under Article 50 of the EU treaty, a country can withdraw its EU membership. Since euro membership is only open to EU countries, Greece would automatically fall out of the currency area if it left the political union. But here too, there’s a catch: Article 50 stipulates that countries engage in a two-year negotiation with Brussels before they can leave, time Greece doesn’t have.

Now, there may be some legal trickery that could be applied, such as a referendum of all 28 euro countries, or perhaps an agreement outside the framework of the EU treaty. The problem with all of these scenarios is that Europe would tacitly be acknowledging that euro membership is revocable, and that makes the euro a revolving door. Further Greek defaults will leave European taxpayers holding the bag for more than €200 billion-euro in aid. Weigh that against market losses that can grow to the trillions in the flash of volatility like we saw on Monday. Now, weigh that against the optics of elderly Greek pensioners begging for food in modern day Europe, and remember the words of Ghandi, who said: “Poverty is the worst form of violence.”

So, when you hear pundits saying they can tell you how the Greek situation will play out, or how the Greeks will vote on the referendum, or that there will be a Greek exit, realize that nobody knows how this will be resolved.

One lesson we have learned: as economies crumble, so does the viability of the digital infrastructure that so much of the world has come to take for granted as the way money moves. The harder an economy is hit, the more valuable cash becomes. Basically the economy returns to cash trading as merchants refuse to accept payment with plastic as they have to take the receipts to be cleared at a bank. The less faith you have in the bank’s ability to clear those receipts, the more likely you are to lean on cash. That’s how a modern day bank run works. And in Greece the banks are closed so plastic is worthless, and the ATMs are empty. A reminder that you can’t stuff “ones” and “zeroes” under your mattress; and when times get tough, cash is still king.

Meanwhile Puerto Rico’s junk-rated power utility said it made a full $415 million bond payment due today and reached an agreement to continue negotiations with creditors to restructure its $9 billion of debt. Its bonds rallied.

The Puerto Rico Electric Power Authority, called Prepa, made the principal and interest payment by selling $128 million of short-term debt to the companies that insure its bonds, including Assured Guaranty. It also tapped reserves and used $153 million from its general fund. The utility extended a forbearance pact with creditors until Sept. 15, which will keep discussions out of court. It must negotiate a plan to overhaul its debts by Sept. 1 to keep the deal in place. The talks with creditors may advance the utility’s effort to pare its debt load. There is still a major problem of $72 billion of debt owed by the Commonwealth of Puerto Rico.

And next on the list is Ukraine; they could suspend debt payments almost immediately if an important meeting with creditors ends in stalemate. Ukraine is asking its foreign bondholders to accept a 40 percent write down or “haircut” on the $23 billion of debt they own, but so far they have not agreed.

Meanwhile, gas negotiations between Russia and Ukraine have fallen apart, after the two failed to agree on a pricing plan at talks in Vienna. The European Commission, which mediates the negotiations between Gazprom and Naftogaz, issued a statement Tuesday evening saying the two sides were “still far apart” on a deal. Ukraine has now stopped receiving gas from Russia, but transit supplies to Europe are continuing at the usual rate.

China’s vast manufacturing sector remained lackluster in June, fueling calls for additional stimulus measures to boost the world’s number two economy. The Shanghai Composite, which entered a bear market on Monday, ended the day down 5.2%.

The U.S. and Cuba have reached an agreement to restore diplomatic relations and reopen embassies in each other’s capitals, the biggest step yet toward ending a half century of enmity between the two countries. The historic deal will be proclaimed in a White House statement today, and follows the two countries’ landmark announcement to normalize relations last December. A U.S. economic embargo against Cuba will still remain in place, and only Congress can lift it.

General Motors sales fell 3 percent in June. Nissan reported June’s biggest gain so far with a 13 percent increase. Fiat Chrysler said U.S. sales rose 8.2 percent in June. Ford Motor missed estimates with a 1.5 percent light-vehicle sales gain; sales of Ford’s F-Series pickups fell 8.9 percent last month. Vehicle prices also climbed in June, with the average transaction price up 1 percent from a year earlier to $31,948.

Swiss insurance giant ACE Ltd. will buy property insurer Chubb Corp for $28.3 billion. The deal will create the world’s biggest property and casualty insurer by underwriting income. The deal is expected to close in the first quarter of 2016.

General Electric expects to accelerate the pace of GE Capital asset sales in the third quarter as the U.S. conglomerate retreats from the banking industry. Since the landmark announcement on April 10, GE Capital has announced asset sales totaling $23 billion in ending net investment, and anticipates $100 billion in sales in 2015.

The US government sued to block Electrolux AB from taking over General Electric’s appliance business, warning that the $3.3 billion deal would leave millions of Americans vulnerable to price increases for ranges, cooktops and wall ovens, products that serve an important role in family life and represent large purchases for many households.

By a 2-1 vote, a federal appeals court has upheld a 2013 decision finding Apple liable for conspiring with publishers to fix e-book prices. Apple is now set to pay $450 million to e-book consumers and lawyers through a settlement originally announced last year.

AT&T’s proposed $48.5 billion acquisition of DirecTV is expected to get U.S. regulatory approval as soon as next week. The Department of Justice has completed its review of the merger and is waiting on the FCC to wrap up its own. The move could create the country’s largest pay-TV company, giving DirecTV a broadband product and AT&T new avenues of growth beyond wireless service.

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