Midnight in Athens


“Never mistake motion for action.” – Ernest Hemingway

As Greece winds it way through its latest contribution to the art of dramatic theatre, it is worthwhile to keep a couple of key distinctions in mind.

The first is that the recent market weakness isn’t all about Greek debt and the fate of the euro or the European Monetary Union (EMU). Investors are also worried about the outlook for the second half of 2011 in the U.S., and directional traders – who have dominated daily action this year – have had little to work with of late in the way of positive surprises on the domestic front.

The Greek drama actually produced both rallies last week – the first on Tuesday in anticipation of a successful confidence vote for Prime Minister Papandreou, and then another Thursday afternoon when Reuters transformed a session that was just about to get some real ugly on into a screaming short-squeeze, with the news of a fresh bailout for the sons of Parnassos.

But markets still slumped to another weekly loss – albeit a minor one, with the Nasdaq able to eke out a small gain – in the face of a weaker outlook from the Federal Reserve bank and another unlooked-for bulge in weekly jobless claims (not to mention a lack of vigor from the rest of the data).

Set against this background, the Greek drama feels more oppressive. While many trading desks spent the recent August-April period in a state of prelapsarian exaltation that had no memory of the events of 2008, the persistent reappearance of the bicker-and-dither European chorus has reawakened memories of previous major missteps by powers-that-were. “Lehman event” is the new vogue for scaring the recalcitrant – “eat your bonds, or a Lehman event will come for you!”

In the next act of our Greek drama, which takes place in the coming week, the parliament will be seen to cut off yet another limb (pass yet another austerity package) in exchange for a fresh dose of plasma and morphine (EU money). It will rally our equity markets for a day. It won’t cure Greek’s problems, they still won’t ever be able to pay back the money, and whatever the politicians may do, the betting here is that the country will eventually reject its permanent recession in favor of another alternative. The country is in the second year of a painful recession, and it’s estimated that the latest package will amount to a cut of a month’s income for an average family of four.

There are other steps still to come this month and next, and we reckon that most of them will slip through unless convulsions in the Greek body politic quickly become too much. Our guess is that it will take a bit longer, but it’s only a guess. If the summer is a rough one, it could unravel sooner. There is a growing awareness in the media that there is no way out for Greece.

Still, the tendency of our markets will be to try to forget the bad stuff until it’s this week’s problem. That resolve to not worry about problems until they are in our face will be tested in the coming weeks by the battle over the debt ceiling, which took a gloomy turn late during the week when two leading Republicans pulled out of bipartisan talks on the grounds that any tax increase at all in unacceptable, even a back-door one.

That pronouncement earned them an immediate dunce-cap award from Reagan budget director David Stockman, who riposted that it was simply not possible to make our way back without both tax increases and spending reductions. Stockman is right on this one, but he never was a hero with the further reaches of the Republican right, which tends to value true belief over pragmatic counting (a trait they share with the further reaches of the Democratic left. True believers prefer black and white; reality is annoyingly gray).

With the debt-ceiling mudslinging to cheer us on, we’ll have a couple more hurdles to jump in the coming two weeks. Next week has a slew of regional manufacturing surveys that culminate Friday in the national survey run by the ISM (Institute of Supply Managers). The Richmond, New York and Philadelphia surveys have all been much weaker than expected this month, and the trend is unlikely to be different elsewhere.

The week after that will bring the June jobs report, and the weekly jobless claim totals haven’t been encouraging. Another print like May isn’t going to cheer the markets. Yet with all that said, there is the end of the quarter coming up Thursday. We noticed an increase last week in attempts to game the market higher, highlighted by low-volume spikes during the middle of the day.

It’s worked the last three months in a row, but a docile tape is needed and so far fear selling hasn’t allowed for one. Expect more mid-day attempts to trigger a chart breakout next week, unless anxieties can keep up the volume in the downside rush for cash, similar to June 2010.

Will the coming earnings season bring relief? Many are counting on just that, but there are another two weeks to go before it kicks off and three weeks until it’s in high gear. It could be a long wait, with lots of motion in between. Bring your motion-sickness meds, and as Hemingway might have added, a shock-proof BS detector wouldn’t hurt either.

The Economic Beat

The news of the week wasn’t housing, as the markets have decided for the time being that it’s too depressing to worry about anymore. It was a close tie between the Fed’s admission that 2011 GDP isn’t going to top 3% (or the 4% that many penciled in back in January), and the International Energy Agency’s (IEA) announcement that it’s going to release 60 million barrels of oil onto the market.

Despite the many snarky (and accurate) observations that 60 million barrels isn’t all that much in the grand scheme of things – less than a day’s global consumption – the maneuver certainly accomplished one goal, namely to knock oil prices down hard. Another result clear from the media coverage was that a hornet’s nest of angry traders got on the horn to the major business outlets to rail against the move. Burning off some of the excess speculation premium was part of the plan. The Iranians, who currently hold the presidency of OPEC, were furious with the move, which only served to increase its popularity in the West.

As for the Fed, it has lowered its outlook for 2011 GDP to a range of 2.7% – 2.9%. It also raised its estimation of the unemployment rate and inflation rate for the rest of the year. Depressing enough, but if the second quarter comes in around the expected 2%, GDP will have to grow at a 3.4% annual rate the rest of the year just to get to the bottom of the Fed’s range. That’s a tall order. The good news is that earnings lag GDP, so the second quarter should still be okay; the bad news is that third and above all fourth quarter earnings could see serious deceleration, which analysts have as yet refused to acknowledge.

Home sales remain weak: the existing home sales rate fell 3.8% as the peak selling season got underway. The year-on-year rate declined to (-15.3)%, though that effect is exaggerated by last year’s tax-credit expiration. It wasn’t good, but the National Association of Realtors speculated it was a trough. Though realtors tend to be perennially over-optimistic, it would be nice if they were right this time. It isn’t showing up in mortgage-purchase application data, which seem to remain perpetually mired below the index basement level of 200.

New home sales fell 2.1 percent from April, but aren’t at the record bottom reached a year ago. They declined more than that in every region but the South, helping the number to beat consensus. Nevertheless, sales are still running at extremely low levels. One silver lining is that the supply of new homes available for sale also hit a new low. The lack of supply will eventually turn the market.

Oddly enough, Federal price home data showed an increase of 0.8% for April, following six consecutive months of declines. It could be a mix issue. The Case-Shiller data come out on Tuesday and should provide a more complete picture.

Jobless claims rose unexpectedly higher to the 428,000 level, increasing the level of foreboding for the June jobs report. The Chicago Fed’s National Activity Index fell again, led by a decrease in May employment.

Although first-quarter GDP managed to get a tick up to 1.9%, that didn’t impress markets much. What’s more, the year-on-year increase in quarterly profits fell to 7.8% annually from 11.4% in the previous quarter. Which direction do you think they’re headed in? Finally, May durable goods rose by 1.9%, led by a rebound in airplane production. Excluding transportation, they rebounded by 0.6%. Business investment rebounded by 1.6%. It was a modest rebound.

Next week will feature the manufacturing sector, with survey reports from the Richmond Fed on Tuesday and the Kansas City Fed on Thursday, the latter being joined by the Chicago Purchasing Manager’s Index. All of that will lead to the national survey report on Friday, the ISM manufacturing survey. Consensus is for a decline to 52, and if it hits that the market will probably rally because 52 is starting to look like a stretch.

The week will begin with the May Personal Income and Spending report, followed by the Conference Board’s influential Consumer Confidence report on Tuesday. The latter is hoping to see a slight rebound from May.

Pending home sales are released on Wednesday, and Friday has the biggest slate of news. Besides the ISM, it features May construction spending, another sentiment measure from the University of Michigan, and data on June car sales. Despite that, Friday could turn sluggish quickly as traders leave early ahead of the impending holiday weekend in the United States (Monday, July 4th, is a national holiday and all markets will be closed).

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