Friday, July 10, 2015

Higher markets on hopes for another Greek bailout

Dow jumped 158, advancers over decliners better than 3-1 & NAZ rose 52.  The MLP index was up 1+ to the 396s & the REIT index climbed 3+ to the 314s.  Junk bond funds were higher & Treasuries retreated.  Oil & gold prices hardly budged.

AMJ (Alerian MLP Index tracking fund)

CLQ15.NYM...Crude Oil Aug 15...52.60 Down ...0.18  (0.3%)

GCN15.CMX...Gold Jul 15.......1,161.40 Up ...2.40 (0.2%)

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The Greek reform proposals are strikingly similar to the ones Greek voters overwhelmingly rejected at a referendum only earlier this week.  Yet, there are a few differences, some crucial & others less substantial.  Greece is asking for 3-year loans of at least €53.5B ($59.9B) to cover its financing needs in 2015-2018.  It is also seeking debt restructuring & reprofiling of its long-term debt due after 2022.  The earlier proposals were in return for a 5-month extension of an existing bailout program for loans of as much €15.5B & didn’t involve any debt restructuring.  Fiscal targets remain the same with primary budget surplus seen at 1, 2, 3, & 3½% of GDP between 2015-2018, even amid signs that the economy may have deteriorated under capital controls & shuttered banks for nearly 2 weeks.  With few exceptions, the gov adopts the creditors’ proposal on sales & corp tax rates.  The gov is seeking to eliminate sales tax discounts on islands gradually by the end of 2016 instead of immediately, starting higher-income islands that are popular tourist destinations.  It also seeks to keep hotels under a reduced 13% rate instead of the standard 23%.  The gov is in agreement with the creditors in eliminating early retirement benefits & envisages savings of 0.25-0.5% of GDP in 2015 & 1% of GDP in 2016, effective from Jul 1, in line with demands under the earlier proposals.  It proposes implementing a “zero-deficit” clause for supplementary & lump-sum pension funds, adopted in 2012, from Oct instead of immediately.  While it agrees to phase out a supplementary allowance for low pensions by the end of 2019, it wants to start phasing-out these benefits from Mar 2016 instead of starting immediately.  Greece wants to increase advanced income tax payment on corp income to 100% & gradually for individual businesses by the end of 2017, as part of steps to close loopholes for tax avoidance.  It also proposes to eliminate preferential tax treatment for farmers by the end end of 2017.  Creditors wanted these steps to be implemented by the end of 2016.  Gov insists to legislating changes to collective bargaining agreements this fall; creditors don’t want any changes to already agreed labor framework & demand that any changes be negotiated with the 3 creditor institutions first: the ECB, IMF & the EU.

The New Greek Bailout Offer Looks Very Familiar

Chinese stocks rose, capping the index’s biggest 2-day gain since 2008, as unprecedented gov intervention helped curb an equity rout that erased $3.9T in less than a month.  The Shanghai Composite Index rallied 4.5% to 3877, adding to the 5.8% surge on Thurs.  With more than 1300 companies still halted on mainland exchanges, trading was limited to 53% of the market.  About 90% of stocks that did trade soared by the maximum 10%.  The rebound helped the gauge climb 5.2% this week after tumbling to 3-month lows on Wed.  Official measures to support shares became more extreme during the week as declines deepened, including a ban on stockholders & executives from selling stakes in listed companies for 6 months, an order for companies to buy equities & an investigation by the nation’s public security bureau into short-selling.  Even as stocks rebounded, foreigners have been net sellers of Shanghai shares every day this week, while local investors continued liquidating bullish bets on the exchange yesterday.  The rebound pared losses by the Shanghai Composite since its Jun 12 high to 25%.  While the median price-to-earnings ratio in China has dropped to 57 from 108 at the height of the rally, valuations are almost 3X as high as those on the S&P 500 Index.  Margin traders cut holdings of shares purchased with borrowed money for a record 14th day on the Shanghai Stock Exchange.  The outstanding balance of margin debt on the nation’s 2 bourses has dropped by $132B from the peak on Jul 8 to $232B thru Wed.

Chinese Stocks Head for Biggest Two-Day Rebound Since 2008

US wholesalers boosted stockpiles in May by the largest amount in 6 months, while sales rose by a modest amount.  Wholesale stockpiles rose 0.8%, double the gain in Apr & the largest one-month rise since Nov, according to the Commerce Dept.  Sales were up 0.3% in May following a 1.7% surge in Apr.  That had been the biggest sales increase in more than a year.  The strong increase in inventory building in May could be evidence that businesses are growing more confident about the future.  A decision to accelerate inventory stocking would help bolster overall economic growth.  The May rise left inventories at the wholesale level at a seasonally adjusted $449B, 3.8% below a year ago.  Sales at both the wholesale & retail levels should rebound in coming months after a slowdown in Q1 caused in part by unusually frigid weather.  A pickup in consumer spending, which accounts for 70% of economic activity, is expected to translate into stronger economic growth for the rest of the year.  The gov has already reported that retail sales accelerated solidly in May.  The big inventory gain reflected larger stockpiles of autos & auto parts as well as furniture, lumber & computers.  Analysts are forecasting a strong pickup in GDP growth for Q2 of 2.5% & growth is expected to accelerate further in H2 to a rate around 3%.

US wholesale stockpiles post biggest gain in 6 months in May

Stocks are pulling back modestly from the strong opening.  The concept of another bailout sounds good to the bulls.  But after 2nd thoughts, some are a little nervous.  The Chinese market is looking a lot better although questions remain whether this rebound can be extended.  Earnings are coming next week, another factor for the stock market to digest.  Dow is still in the red YTD.

Dow Jones Industrials


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