Greek Boat Rental taken by the group from Europe for 80 billion Euro…
Prime Minister Alexis Tsipras surrendered to European demands for immediate action to qualify for up to 86 billion euros ($95 billion) of aid Greece needs to stay in the European Union. After a six-month offensive against German-inspired austerity succeeded only in deepening his country’s economic mess and antagonizing his European counterparts, there was no face-saving compromise on offer for Tsipras at a rancorous summit that ran for more than 17 hours. “Trust has to be rebuilt, the Greek authorities have to take on responsibility for what they agreed to,” German Chancellor Angela Merkel said after the meeting ended just before 9 a.m. in Brussels Monday. “It now hinges on step-by-step implementation of what we agreed.
So where do we stand now?
Violent, highly correlated, news driven markets are great for short-term traders (and counter-trend strategies) but they are headaches for most everyone else. If you like to read the market tea leaves like I do, then the Greece & China events have made the markets indecipherable. In the short term, the market was pushed into oversold territory on Tuesday & Wednesday, but as the chart below shows, the rush to buy protection in the options market has pushed the VIX into the high teens; still shy of the very fearful 20′s. I will be watching the major indexes to see if the bounce back buying volumes are as strong as the last 2 weeks’ selling. And I will be closely watching where buyers are placing new chips now that Greece might be moving to a back burner. Given the sheer cost to temporarily fix Greece, I would expect the euro to see headwinds. If a Grexit comes off the table then the FOMC will have one less item to worry about moving them closer to their first interest rate hike, which will help the U.S. dollar, hurt Bonds and benefit Financial Stocks.
China’s equity market moves have been incredible and should have some economic impact, but it shouldn’t be a disastrous one…
Since peaking on June 12, the Shanghai Composite Index has plunged 25 percent while the Shenzhen Index has nosedived 35 percent over the same period (top chart). In about a month, 20 trillion yuan (more than $3 trillion) has been erased from the market capitalization of the Chinese stock market. Declines on that order of magnitude in the American stock market would bode ill for the U.S. economic outlook. However, there are reasons to believe the economic fallout in China may not be quite as bad as it would be in the United States. For starters, roughly two thirds of the Chinese stock market capitalization represents state-owned enterprises whose shares are held by the government. Although stocks account for a larger share of household financial assets today compared with a decade ago, Chinese households still hold the majority of their financial assets in the form of bank deposits (bottom chart)
June’s negative auto data point showed that China may not be a positive talking point for the rest of 2015…
The auto industry’s biggest market has slipped into the slow lane, with China new-car sales last month registering a rare decline that presents another emerging markets’ headache for global auto makers. Most auto executives had been forecasting 2015 sales in China to slow to a high, single-digit percentage gain over 2014, but that now looks optimistic. On Friday, the China Association of Automobile Manufacturers said June passenger-car sales fell 3.4% over a year earlier, just the third monthly decline since September 2012. Unlike the past two monthly declines, which were fueled by a weeklong holiday in 2013 or political events, the latest skid comes amid broader warning signs: the country’s economy is slowing, its stock markets are falling and more analysts say the Chinese auto industry has too much production capacity.
Thoughts on China from a 40 year Emerging Market guru…
While we are already investing in China, our strategy is to wait until prices are so attractive that it’s time to look for further long-term opportunities. We believe that point is close with some stocks, but we probably haven’t hit the bottom yet. The good news is that, based on market studies we’ve done in the past, these types of bear markets (and I would deem this a bear market) tend to be short in duration; they don’t last too long, and when the recovery comes, it tends to be bigger in percentage terms…
In our view, the China story is still intact. China is still growing at a good pace, and we believe it’s an important global market that we want to have exposure to for the long term. We know that China has slowed from the 10%+ growth rates it has had in the past. It’s still a very big, fast-growing economy, and we believe in the merits of investing in equities in China. If we can do so at a lower price, so much the better
But even as China and Greece have added volatility to the financial markets, Janet Yellen remains on track to raise interest rates in 2015…
“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 in her first public remarks since the June meeting of the Federal Open Market Committee. Yellen added a note of caution, saying that “the course of the economy and inflation remains highly uncertain, and unanticipated developments could delay or accelerate this first step.
As does the Fed’s leading Dove…
One of the Federal Reserve’s most dovish officials said on Friday that September may turn out to be the right time to raise interest rates if the U.S. economy continues to improve, and he set a relatively high hurdle for delaying the move until next year. Boston Fed President Eric Rosengren said in an interview that while wild cards remain – including the recent drop in oil prices, China’s economic slowdown, and the ongoing Greek debt crisis – the U.S. central bank could move to tighten policy at any upcoming meeting, including one in mid-September.
“I don’t rule out any of the meetings from here on out,” Rosengren told Reuters by phone. “If we do continue to get improvement in labor markets, if we do become reasonably confident that we’re moving back to 2-percent inflation, it may be appropriate as early as September,” he said of raising rates from near zero. “I don’t think we have seen that evidence yet but we still have a couple months of data to see whether it’s more strongly confirmed.”
China growth, Iran nuclear talks and a surprise lift in summer oil inventories led to another big sell-off in Energy last week…
The IEA thinks prices will remain under pressure until 2016…
Oil prices may fall further as the world remains “massively oversupplied,” before markets tighten in 2016 when output growth outside OPEC grinds to a halt, according to the International Energy Agency. There will be no overall production growth outside the Organization of Petroleum Exporting Countries next year for the first time since 2008, according to the IEA. Growth in U.S. shale oil supplies will stagnate to the middle of 2016 while output declines in Russia, the Paris-based adviser said in its first detailed assessment of the year ahead. Global oil demand growth will slow, the agency predicted… “The rebalancing that began when oil markets set off on an initial 60 percent price drop a year ago has yet to run its course,” according to the report. “Recent developments suggest that the process will extend well into 2016.”
So U.S. energy hubs will see further economic pressures…
“We find ourselves back in the wilderness again,” said Robert Dye, the chief economist of Comerica Bank in Dallas (NYSE:CMA). In Houston, the fortunes of hundreds of oil and gas companies and thousands of their blue- and white-collar workers are tied to how the market moves from here. Not only are low oil prices a weight on Houston’s economy and its job market, but the oil-market volatility itself will be a drag on Houston capitalism by fomenting uncertainty about whether local and offshore business investments will pay off. “Everyone in Houston, from auto dealers to grocery stores and restaurants, feels the impact of reduced wages and jobs in the drilling and exploration sector,” Dye said.
China and Commodity worries led to last week’s underperformance in Materials, Energy & Tech. Domestically focused Consumer names, Health Care and Utilities outperformed…
More broadly, Europe gained on hopes for a Greek resolution while anything touching China, Energy or Commodities suffered…
The recent equity market de-risking can also be seen in the outperformance of Low Volatility versus High Beta. Keep an eye on this to see if it recovers with a Greek resolution and bounce in China…
Top holdings of the Low Volatility and High Beta ETFs…
Another RISK barometer in the market appears to be in the form of the top new restaurant concept: Shake Shack…
The shareholder base in Shake Shack Inc (NYSE:SHAK) will orient toward retail and very high beta institutional. With seven down weeks in a row, watch for a bottom to help gauge psychology.
U.S. corporate earnings begin a concentrated 3 week span this week. So most importantly, there will be many new data points to filter through for individual companies and industries. Also important is that many stock repurchasing companies are now in the quiet period and thus not allowed to buy their own shares until after they report.
Cool Chart: Twenty Four S&P 500 companies have reported Q2 earnings so far. Here is where they are throwing blame…
Based on the earnings calls to date, the stronger U.S. dollar has been cited by the most companies (17) in the index as a factor that either had a negative impact on earnings or revenues for Q2, or is expected to have a negative impact on earnings and revenues in future quarters.
If you are a leader in your category, here is how you absorb a +14.4% minimum wage increase…
Chipotle Mexican Grill (NYSE:CMG) raised it prices in San Francisco as much as 14.4%, after the city raised its minimum wage by 14%, according to an analyst. William Blair’s Sharon Zackfia said in a client note Monday that the popular Mexican fast-casual chain jacked up prices across the board by 10.5% on average in San Francisco, with beef entree prices up 14.4%, large soda up 11.1%, chips up 10.3% and water up 10%.
Chipotle restaurants in cities like Denver, Minneapolis, Chicago and Orlando also saw increases in William Blair’s latest weekly survey, but those averaged 0.5% across all items. “We believe the outsized San Francisco price hike was likely because of increased minimum wages (which rose from $10.74 per hour to $12.25 on May 1) as well as scheduled minimum wage increases in future years,” Zackfia said in the report. Next year, the city’s minimum wage will rise to $13, then $14 in 2017 and $15 in 2018.
The front cover of Barron’s is helping clients get in touch with their Financial Advisors this week…
After this weekend’s Comic Con, the question for Disney is ‘How many weeks until it punches $2b at the box office?’
And ‘other side of the tracks’ becomes ‘other side of the fiber’…
As the Internet becomes central to the way Americans work and live, the digital divide is taking on greater economic significance. Students without Internet access at home may struggle to keep up with school assignments. Towns with less access find themselves falling behind economically, researchers say. Now, the availability of speedy Internet service is starting to affect Americans’ biggest purchase: their homes.
Real-estate agents across the country say more buyers like Ms. Burke and Mr. Cairns are turning their noses up at homes without fast Web access. Some studies suggest those buyers are having a keen effect on home prices. A nationwide study released on Monday by researchers at the University of Colorado and Carnegie Mellon University finds fiber-optic connections, the fastest type of high speed Internet available, can add $5,437 to the price of a $175,000 home—about as much as a fireplace, or half the value of a bathroom
Speaking of the Internet, how much of the 10-bagger move in Domino’s Pizza is due to their online ordering app? Wow. Pizza. Wow.
Meanwhile in Chicago, if you do something over the internet, they will find a way to tax you…
The Windy City needs cash, and its citizens like to watch movies and develop web apps. Time to get on that gravy train. A ruling by Chicago’s Department of Finance allows the city to add an extra nine percent tax onto “electronically delivered amusements” and “nonpossessory computer leases.” In an odd combination, buying a subscription to streaming media, such as Netflix (NASDAQ:NFLX) or Spotify, would qualify, as would using a cloud computing platform, such as Amazon (NASDAQ:AMZN) Web Services. Each would be subject to 9% tax; Chicago is the first major American city to levy a tax on either streaming services or cloud computing services
Letter to the Editor of the Week…
@garrettmurphy: Love the complaint letter in the FT weekend about Minecraft. From Zorawar
aged 6. @MinecraftEdu
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