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

Financial Review

No

Sinclair Noe — July 6, 2015

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

Subscribe: iTunes | Android | RSS

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.

FINANCIAL REVIEW

A Grain of Salt

Sinclair Noe — February 5, 2015

Podcast: Play in new window | Download (Duration: 13:17 — 6.1MB)

DOW + 211 = 17,884
SPX + 21 = 2062
NAS + 48 = 4765
10 YR YLD + .02 = 1.82%
OIL + 2.26 = 50.71
GOLD – 4.40 = 1265.50
SILV – .11 = 17.32

More people sought unemployment benefits last week, but the number of applicants remained near historic lows in a positive sign for job growth. The Labor Department says that weekly applications rose 11,000 to a seasonally adjusted 278,000. The four-week average, a less volatile measure, fell 6,500 to 292,750. That average has plunged 15 percent over the past 12 months.

Worker productivity declined in the fourth quarter of 2014, while labor costs increased. Productivity, the amount of output per hour of work, fell at 1.8 percent rate in the fourth quarter after rising at a 3.7 percent rate in the third quarter. Labor costs increased at a 2.7 percent rate in the fourth quarter after having fallen at a 2.3 percent rate in the third quarter. The drop in productivity and rise in labor costs are reflected in the fact that the growth in overall output slowed in the fourth quarter.

The U.S. trade deficit jumped 17.1% in December to a two-year high. The nation’s trade gap jumped to a seasonally adjusted $46 billion in December from a revised $39 billion in the prior month.

If Anthem is your health insurer it may be time to change your passwords – all of them. Anthem said hackers broke into a database containing personal information for about 80 million of its customers and employees in what is likely to be the biggest data breach disclosed by a health-care company. Anthem said the breach exposed “names, birthdays, street addresses, social security numbers and employment information, including income data,” but added that no financial information, including credit card details, was compromised. Anthem said it would send a letter and email to everyone whose information was stored in the hacked database. It also set up an informational website, www.anthemfacts.com, and will offer to provide a credit-monitoring service.

This next item won’t do anything to prevent hacking, but it will mean that you have the same access to the internet as anybody else. FCC chairman Tom Wheeler is now officially on board supporting the strongest possible version of net neutrality. Wheeler said by placing broadband Internet providers such as Comcast and Verizon Wireless under a stricter regulatory regime, consumers would be ensured an open Internet under Title II. Under the new plan, broadband providers would be explicitly banned from blocking content or creating fast lanes for Web services that can pay for preferential treatment into American homes.

Title II is the law that currently regulates telephone networks as common carriers. Applying this to broadband internet gives the FCC extremely strong powers to guarantee free and equal internet access to everyone, just as they currently do for phone companies. The argument against doing this is that Title II has a lot of baggage designed specifically for phone companies; baggage that makes sense for telephones but not for internet connections. Wheeler recognizes this, and says that he plans to “modernize” Title II. A five member FCC panel will vote on Wheeler’s recommendation February 26th.

Industry lobbying groups such as Broadband For America argue that Wheeler’s proposal “could have spillover effects into the broader Internet ecosystem and threaten Silicon Valley companies that rely heavily on the Internet,” take that with a grain of salt. The markets certainly weren’t alarmed. Stocks for the big telecos went up today as market-watchers were relieved that the FCC said it wasn’t going to regulate what the cable and phone companies charge us for internet access.

Fifty years after the internet’s creation, about half the world now uses it to do almost anything and almost everything. The possibilities are only limited by our imagination. Why has the Internet worked so well? Because it’s a level playing field. Everyone has an equal opportunity to compete, to succeed or to fail, to put one’s best ideas or products forward and let the chips fall where they may.

Through a free and open Internet, an excellent idea or an individual can beat a powerful established institution. But we need rules to make sure that in the battle of content it is a fair fight, and that winners and losers are determined by the quality of the content and nothing else.

Late yesterday, the European Central Bank (ECB) announced that it would no longer accept Greek government bonds and government-guaranteed debt as collateral. Although Greece would still be eligible for other, emergency lending from the Central Bank, the immediate effect of the announcement was to raise Greek borrowing costs and squeeze its banks, and to increase financial market instability within Greece, maybe even bank runs.

Syriza, the newly elected political party in Greece took power with a promise to Greek voters to get rid of the anti-austerity programs that were part of an earlier IMF-ECB bailout. The Greeks had lived up to the bailout terms to the best of their ability but the economy did not improve, it only got worse. The Greek voters decided they had had enough.

Yesterday’s move by the ECB looks very much like a deliberate attempt to undermine the new government. They are trying to force the government to abandon its promises to the Greek electorate, and to follow the IMF program that its predecessors signed on to. Syriza’s leadership was unbowed by the ECB’s assault. They are not going to voluntarily leave the euro or even suggest the possibility. They are continuing to look for a debt restructuring plan. PM Alex Tsipras said today, “Greece won’t take orders any more, especially orders through emails. Greece is no longer the miserable partner who listens to lectures to do its homework. Greece has its own voice.”

A funny thing happened today. The Athens Stock Market General index dropped, by just over 3%; the markets took it with a grain of salt. That is a sizeable drop but not enough to instill fear in the Greeks; they’ve seen much worse in the past couple of years.

The move is seen as a definitive warning that the ECB is in no mood to give in to Athens’s request for a debt swap. For now it’s all part of the negotiations. Greek banks only have about €8 billion in Greek government debt used as collateral with the ECB. And the Greek economy is in such a bad way, they might not even notice if they ran out of cash for a few months. The crazy part is that the Greek debt is not a huge mountain; the Eurozone could easily afford restructuring. What they can’t afford is to cut off one of their own and leave them hanging out to dry.

And so, what happened yesterday was probably less of an effort by the ECB to force the Greeks into a deal, as it was to force the Germans into a deal; a wake-up call for Angela Merkel and the hard line austerian crowd that if Greece collapses, the entire Eurozone could collapse, and that would be very expensive. Or maybe the ECB is willing to turn Greece into a failed state out of what looks like sheer brutality. Time will tell.

If you were to head over to California to the neighboring ports of Los Angeles and Long Beach, you might typically see one or two of those huge container ships waiting offshore to load or unload. Today, you would see about 18 big ships sitting offshore, and nobody is quite sure how long it will take for them to load or unload. There has been a slowdown at the ports, which alone handle 40% of US container traffic. And contract negotiations with port workers threatens a lockout by employers, possibly within days. A port closure would likely result in losses of $1.5 billion to $2.5 billion per day.

CME Group, the world’s largest futures-market operator, is closing most of its futures trading pits in Chicago and New York as electronic trading has become the overwhelmingly dominant way futures contracts are bought and sold. The move will take effect by July 2. Remember those pictures of traders yelling and screaming and elbowing each other to get an order filled? Yea, they don’t do that anymore. Times change.

Facebook is up about 18 cents in afterhours trading. And that might just be enough. Once upon a time, John Pierpont Morgan created a banking behemoth; such a powerful force that it bailed out Wall Street; then went on to create the world’s largest company at the time, US Steel. The House of Morgan has been a financial leader for more than a century, and with a market cap of about $211 billion, it is a powerhouse to this day. Except, it looks like Facebook has just passed it in terms of market capitalization; not by much, maybe just a couple of hundred million.

On a related note, it’s time for today’s edition of “Banks Behaving Badly”: JPMorgan has agreed to settle a class action lawsuit for $500 million; this goes back to mortgage backed securities sold by Bear Stearns, which was acquired by JPMorgan. Among the plaintiffs in this case were the Public Employees’ Retirement System of Mississippi and the New Jersey Carpenters Health Fund. A judge must still approve the settlement.

Meanwhile, the Justice Department and the Federal Bureau of Investigation are examining Swiss bank UBS for allegedly helping its American wealth-management clients avoid taxes by putting their money into investments that are banned in the US; called bearer securities because they can be transferred without needing to register ownership. Authorities are also trying to determine whether anyone at the bank engaged in criminal efforts to cover up the alleged conduct once it became more widely known about within the bank. This isn’t the first time; in 2009, UBS acknowledged helping American clients evade taxes, and agreed to pay $780 million as part of a deferred prosecution agreement with US authorities. It looks like UBS has a recidivism problem; now, let’s see if the Justice Department has a spine.