Market Perspective for June 29, 2015

Greece has reached the end of the road and hopes for a deal are quickly vanishing. Greece’s stock market has shut down for the week and banks will be closed until Thursday, when they will open only to allow pensioners to withdraw a maximum of 240 euros. Although Greece’s stock market is closed, investors can still trade the Greek ETF (NYSEARCA:GREK). It fell 16 percent on Monday, below its closing low for the past 52-weeks.

The euro immediately fell when news of the Greek bank holiday hit the wires, but it subsequently rebounded and recovered nearly all of its losses. U.S. equities opened lower on the news and shares fell over 2 percent on the day. European shares including the German DAX and French CAC 40 were both down more than 2.5 percent. Gold prices were volatile, moving up and down, closing up 0.49 percent. One sector bucking the trend is agricultural commodities. Wheat, corn and soybeans were all higher on Monday.

Greece isn’t the only potential sovereign defaulter this week. Puerto Rico has decided to stop paying its bonds. Many high-yield municipal bond funds have shed Puerto Rican bonds as this outcome has been signaled for some time. Market Vectors High-Yield Municipal Index (NYSEARCA:HYD) was off by 1.45 percent on the day.

U.S. treasuries are benefiting from the turmoil overseas, but the decline in interest rates isn’t yet significant given the gains we’ve seen over the preceding weeks.

This is a holiday shortened week for the markets, but some important economic data will be released. Construction spending for May and auto sales for June will be out on Wednesday, along with the manufacturing PMI for June. On Thursday, the June unemployment rate and May factory orders will be released. Depending on how events play out in Greece, this data may be overshadowed, but they’re likely to provide more evidence of improving economic strength domestically. Overseas PMIs are also due out this week, with China’s being of particular importance.

Chinese stocks slid again on Monday. The main board in Shanghai is now down more than 20 percent since peaking a few weeks ago, while the start-up index, similar to the Nasdaq, has corrected more than 30 percent. The People’s Bank of China cut interest rates and reserve requirements over the weekend in a bid to staunch the slide and aid the slowing Chinese economy. Although official economic growth may be running just below 7 percent for the quarter, in reality GDP growth is likely much lower. In May, industrial profits were only up 0.6 percent year-over-year.

This week is light on earnings: Paychex (NASDAQ:PAYX) and ConAgra (NYSE:CAG) are the two biggest names that will be reporting.

Market Perspective for June 26, 2015

This was a big week for global financial markets. In Greece a deal is finally on the table, but we don’t yet know if it will be accepted. In the United States the Supreme Court ruled in favor of the Affordable Care Act, sending health insurers sharply higher. More importantly for the market was the rise in consumer spending in May, which removes the last major obstacle standing in the way of higher interest rates.

A hard deadline is now in effect for Greece as a debt repayment to the IMF is due on June 30. Eurozone creditors have offered Greece a deal, extending the remaining funds from prior agreements if it passes the first part of a series of demanded reforms. This would keep Greece out of trouble for 5-months. There was a lot of optimism today when the offer was announced, but the Greek prime minister rejected the 5-month extension less than an hour later. About the only thing that we can say for sure is the downside of a Greek default will be more volatile than the upside from an agreement because the markets are still relatively optimistic, and a 5-month extension doesn’t resolve the issue the way a default would.

Domestically, the Supreme Court ignored the plain meaning of the Affordable Care Act and salvaged the law. At issue were subsidies paid to consumers who cannot afford the higher premiums under the new law. With subsidies now available to everyone, the money will continue to flow from Washington. The main reason we’ve been bullish on healthcare over the past few years, despite the occasional turmoil surrounding the ACA, is predicated on our belief that the government will inevitably increase spending. Demographics guarantee healthcare will continue to grow faster than the overall economy in coming years and much of it will be funded by rising Medicare costs. The immediate effect from the ruling was a rise in health insurer stocks, but long-term the benefits will flow to the entire healthcare sector.

Consumer spending in May rose 0.9 percent from April. This was the largest jump in spending since August 2009, when the economy was recovering from the recession. Consumer incomes were up 0.5 percent. The Atlanta Federal Reserve Bank’s GDP Now forecast rose to 2.1 percent growth this week thanks to this consumption data.

The Federal Reserve has been worried about the consumer, afraid that economic growth seen in manufacturing and services wasn’t translating into consumption growth. This uptick in May spending puts those worries to rest, though, and consumption data is the final nail in the coffin for zero interest rate policy if it is sustained. The 10-year treasury bond yield is back near its 2015 highs today.

The financial sector held steady and outperformed the broader market thanks to rising interest rates. Bank stocks remain the most attractive sub-sector. The healthcare sector also did well thanks to the Supreme Court ruling, but biotechnology and pharmaceuticals followed the broader market lower, weighing on funds that overweight those sectors.

ETF Watchlist for June 24, 2015

PowerShares U.S. Dollar Index Bullish Fund (UUP)
CurrencyShares Euro Trust (FXE)
Global X FTSE Greece 20 (GREK)
CurrencyShares Japanese Yen (FXY)

Greek shares rebounded strongly over the past week after a deal with creditors appeared likely. The National Bank of Greece (NBG) rebounded 27 percent to its high on Tuesday. On Wednesday, there was no deal, with both the EU and IMF rejecting Greece’s offer. Shares started to slip, but overall investors have shares trading much higher than a week ago.

Given the history of negotiations, it is hard to know if time is really running out or not. Just this past weekend it was indicated a deal was needed by Monday night. Now a deal is supposedly needed by Wednesday night. Greece needs money to pay maturing IMF debt on June 30, so clearly that is the end of the line in terms of funding. Emergency funding could push the day of reckoning farther back, but the parties appear to be drifting apart rather than coming together. Rhetoric has been sharp on all sides and the parties aren’t publicly budging from their positions. The Greeks want tax increases and no spending cuts. The IMF wants spending cuts or debt relief, but no tax increases. The Germans do not want to give Greece debt relief. Leaked documents from the latest meeting show European negotiators have redlined at least 75 percent of the Greek proposal.

The euro slid on Tuesday when a deal appeared likely, and then it rebounded when the deal didn’t happen. The yen fell back and emerging market currencies also declined on Tuesday, erasing small gains from earlier in the week.





iShares iBoxx Investment Grade Corporate Bond (LQD)
iShares iBoxx High Yield Corporate Bond (HYG)
ProShares High Yield Rate Hedged (HYHG)

On Tuesday, Federal Reserve Governor Jerome Powell said the Fed would like to raise rates as soon as September and he put a second rate hike back on the table, albeit one that would be data driven. Although his comments are seemingly at odds with last week’s Federal Reserve policy statement, if the data were to improve as he expects, the Fed would face pressure to hike earlier.

Rates had been rising in the wake of the Fed’s announcement last week, but dipped on Tuesday. Events in Greece are having a greater impact on the market than comments from Fed officials and may continue to do so at least until there is a resolution.






SPDR Energy (XLE)
FirstTrust ISE Revere Natural Gas (FCG)
Guggenheim Canadian Energy Income (ENY)
Market Vectors Russia (RSX)

Crude oil prices are now at their highest point in six weeks, setting up a potential breakout for black gold. Inventories have been coming down as U.S. crude oil demand rises during the summer driving season.





SPDR Utilities (XLU)
SPDR Pharmaceuticals (XPH)
SPDR Materials (XLB)
SPDR Consumer Staples (XLP)
SPDR Consumer Discretionary (XLY)
SPDR Healthcare (XLV)
SPDR Technology (XLK)
SPDR Financials (XLF)

The rebound in interest rates last week sent the utilities sector lower again. The chart below shows the performance of each sector relative to the S&P 500 Index; overall XLU slipped 1.15 percent and was the only sector to lose ground on the week. XLU is now approaching its lows for the year.

At the other end, healthcare remains the stalwart leader of this bull market. For at least a couple of weeks, we’ve been watching the large cap biotechnology space for signs of a breakout. Last week it moved up, breaking out from a nearly 4 month sideways trading range.

iShares Dow Transports (IYT) held steady in the past week, but a move lower remains the more likely path over the short-term.

Bank stocks rebounded along with interest rates last week and remain one of the strongest sectors in the market at the moment.







SPDR S&P 500 (SPY)
iShares Russell 2000 (IWM)
S&P Midcap 400 (MDY)
SPDR DJIA (DIA)
PowerShares QQQ (QQQ)

Small-caps have broken away from mid- and large-caps, while the Nasdaq continues to do well versus the S&P 500 Index. The Dow Jones Industrial Average continues to underperform. IWM and QQQ have been taking turns leading the market since October, but small-caps are in a slight uptrend versus the tech-heavy index. Mid-caps are still leading the broader market this year, but they haven’t followed small-caps higher over the past month.




db X-Trackers Harvest CSI 300 China A-Shares (ASHR)

The main Shanghai board fell 13 percent last week as the Chinese rally suffered a correction, but shares recovered midday on Tuesday. On a 1-year chart, the drop doesn’t look like much because shares are still up more than 125 percent after the drop. Regulators are partially blamed for the decline because they cracked down on margin, but they cannot directly control outside lenders. China’s margin rules are similar to those in developed markets, but some investors are leveraged 4 to 1 or more thanks to loans from credit companies. The government hopes to restrain leverage and slow the advance of the bull market.

iShares MSCI Ireland (EIRL)

Although Europe is in turmoil over the situation in Greece, EIRL broke out to a new 52-week high last week. The country is also deeply in debt, but it made the tough choices back in 2008 and 2009. Since 2012, shares have been in an uptrend.

Market Perspective for June 22, 2015

The Greece debt debacle continues into another week. The stakes are higher with Greece apparently days away from default if it doesn’t reach a deal with creditors. The European Central Bank kicked the can today, extending emergency funding to Greece, but only until the end of the day. The ticking clock didn’t spook investors though; optimism in Europe sent the German and French stock markets up more than 3 percent at one point, but by Monday morning, officials at the negotiations were warning it was unlikely a deal would be reached today.

In the United States, optimism out of Europe helped to push both the Nasdaq and Russell 2000 to new all-time highs in early Monday trading. The S&P 500 and Dow Industrials are still below their all-time highs, though they could hit new records over the coming days.

On Wednesday, the final revision of first quarter GDP will be released, which is forecasted to be negative 0.2 percent. This number will get headlines, but the more important data is from the current quarter: new homes sales in May, the flash PMI for June and consumer spending. Strong data could push up growth forecasts for the current quarter. The Atlanta Fed’s GDP Now model currently forecasts 1.9 percent growth based on data received so far.

Overseas, PMI’s for a number of nations will be closely watched, with China’s being the most important. While the Chinese stock market is closed for a holiday on Monday after shares fell more than 6 percent on Friday and 13 percent last week. The stock market in China doesn’t affect global markets due to capital controls that limit foreign investment, but its stock market is one of the few bright spots in the world’s second largest economy. Investors are cashing in stock winnings to buy real estate and startups are raising capital to fund development. If the market slides, it would be worrisome for an economy that has likely slowed below 7 percent annualized GDP growth and where real estate investment had stalled.

We’re in the lull between earnings seasons, but this week will see several well-known firms report including Blackberry (BBRY), Micron Technology (MU), Nike (NKE), Monsanto (MON) and Carnival (CCL). Homebuilder Lennar (LEN) is also worth keeping an eye on. The homebuilding sector has been hurt by rising interest rates and homebuilder funds such as Fidelity Select Construction & Housing (FSHOX) and iShares US Homebuilders (ITB) are off their highs set in April. KB Home (KBH) shares rallied more than 8 percent on Friday following an earnings beat and were up more than 1 percent again on Monday morning. If Lennar can beat estimates as well, it would bode well for the sector. Given the housing sector’s role in the economy, it would also be good news for GDP.

The U.S. dollar will be a key asset to watch over the coming days. Although investors turned very optimistic about the potential for a deal with Greece, pushing up stock prices across Europe, the euro barely budged. A rally or failure to rally by the euro would be significant here because the U.S. Dollar Index has significant support in the 93 to 94 range. A break lower wouldn’t doom the U.S. dollar bull market, but it would open up the potential for another move lower. If the euro doesn’t rally in the wake of a deal, it would be a significant bearish signal for the euro, and a bullish one for the greenback.