U.S. stocks erased early gains, as investors kept an eye on Greece. While Greek voters prepare for Sunday’s referendum, the IMF said today the nation requires a comprehensive debt restructuring and additional bailout of more than 60 billion euros ($66.6 billion) through 2018.
The Dow fell 27 points, with 19 of its 30 components advancing; the S&P 500 Index shed less than 1 point; and the Nasdaq lost 3 points. Advancers and decliners were about even on the NYSE and decliners led advancers by five to three on the Nasdaq. The prices of Treasuries strengthened. Gold futures fell $5.80 to close at $1,163.50 an ounce. The price of crude oil slipped by 3 cents, settling at $56.93 a barrel.
For the holiday-shortened week, the Dow, S&P 500 Index, and Nasdaq fell 1%.
In other business news:
Join Capital Market Strategists John Manley, Jim Kochan, and Dr. Brian Jacobsen as they discuss the powerful forces supporting growth in Europe and certain emerging markets.
Brian Jacobsen, Ph.D., CFA, CFP®; Wayne Badorf, CFP®, CFS®; and Jon Lagerstedt put events in Greece into perspective.
Listen to the podcast.
Jon Lagerstedt: Hi, this is Jon Lagerstedt.
Wayne Badorf: And I’m Wayne Badorf.
Jon: If you’re looking for part four of our program on attracting the generations: Millennials, we’ll bring that to you next week.
Wayne: This week we wanted to break in with a special update on Greece. It’s a fluid situation, and your clients are looking for insight. You’ll get that right here on The Essential Practice.
Jon: Thanks for joining us.
Wayne: Here to help us stay connected to the capital markets is Dr. Brian Jacobsen. Brian, welcome.
Dr. Brian Jacobsen: Thanks for having me back.
Wayne: We appreciate you having the flexibility to be with us today. There’s been a lot of news this week on Greece, and we wanted to have a special program to talk about what this news means to a financial advisor and to their clients.
The crisis in Greece grew even more confusing today, as all sides now are awaiting the results of the scheduled July 5 referendum, but Greece’s leaders and European officials have different interpretations of what the votes could mean. In the U.S., meanwhile, stocks gained ground, partly due to good reports about auto sales, manufacturing, and private-sector employment.
The Dow rose 138 points, with 24 of its 30 components gaining ground; the S&P 500 Index gained 14; and the Nasdaq increased 26. Advancers led decliners by five to three on the NYSE and more narrowly on the Nasdaq. The prices of Treasuries weakened. Gold futures fell $2.50 to close at $1,169.30 an ounce, and the price of crude oil sank 4.22%, or $2.51, to settle at $56.96 a barrel. Oil was pressured by a rise in crude inventories and reports that the U.S. and Iran were nearing a breakthrough on nuclear negotiations.
In Other Business News:
Now that Greece has defaulted on its debt to the International Monetary Fund (IMF), what happens next?
First, Greece hasn’t defaulted, at least according to the technical meaning of the term. Technical meanings are important here. Greece is now “in arrears” to the International Monetary Fund (IMF). This isn’t merely semantics, as a default is a credit event and can trigger payouts on credit default swaps and trigger provisions in other debt obligations. Being in arrears isn’t a good thing, but the IMF can be patient in dealing with Greece. Greece owes the IMF 31.8 billion euros. Missing one payment means that Greece gets a stern warning and is publicly shamed. Those might not be effective tools for getting Greece to pay up, but the fact that no further assistance is available from the IMF could encourage Greek leaders to make good.
Second, only some of Greece’s creditors could demand immediate payment, because some of the nation’s debt can be accelerated. That debt is held by the European Financial Stability Facility (EFSF), which was created as a temporary fund to help beleaguered countries and was replaced by the European Stability Mechanism, a permanent bailout program that helped Spain (which finished its program) and Cyprus. The head of the EFSF will not likely demand immediate repayment from Greece. Right now, the creditors and the Greek government are engaged in a battle for goodwill. Demanding immediate payment would likely turn Greek citizens against the creditors, almost ensuring that Greek voters choose to say “No” to any bailout.
U.S. stocks ended ahead as Greece’s last-minute request for a third economic bailout was ill-received by European Union negotiators who watched the clock tick as the current bailout agreement was set to end. The Dow rose 23 points, with 16 of its 30 components retreating; the S&P 500 Index added 5 points; and the Nasdaq gained 28. Advancers led decliners by three to two on the NYSE and five to three on the Nasdaq. The prices of Treasuries weakened. Gold futures fell $7.20 to close at $1,171.80 an ounce. The price of crude oil rose $1.14, settling at $59.47 a barrel.
In earnings news:
On June 28, Puerto Rico Governor Alejandro García Padilla told The New York Times that the economically troubled island would be unable to pay its $72 billion in public debts, while the commonwealth would seek concessions from its creditors in order to avoid what he termed “a death spiral.”
The market for Puerto Rican bonds reacted swiftly. Month to date (as of June 29), the average Puerto Rican security included in the Barclays Municipal High Yield Index has fallen over 9%. Longer-dated general obligations from the commonwealth have fallen roughly 12% to begin this week. Owners of Puerto Rican securities vary, as do the opinions on fair valuations. Since 2012, we have believed that unenhanced Puerto Rican municipals have not compensated investors for their risk. Investors who purchased bonds from 2012 or earlier likely have positions that trade at a loss. More recent buyers have included hedge funds and emerging markets debt managers who are attracted by the large amounts of debt available as well as the exceptionally high yields. We caution that buying the debt because it appears cheap is not a sound investment thesis (sometimes things are cheap for a reason).
Today we have a guest post from Jeff Moser, a portfolio manager and chief operating officer at Golden Capital Management, LLC, a subadvisor of Wells Fargo Advantage Funds.
The wait is on for the Federal Reserve (Fed) to tighten money supply. After six years of slow and steady economic recovery, the Fed has finally signaled its intent to raise (or normalize) interest rates.
The Fed’s past policy action, known as quantitative easing (QE), in response to the 2008–2009 financial and real estate crisis, was a huge provider of liquidity into the banking system, U.S. economy, and financial markets. As a result, lower-quality, higher-risk assets were tremendous beneficiaries of the massive liquidity injected into the U.S. banking system. The boost to low-quality securities was most powerful at the start of QE, but the effect weakened as monetary stimulus declined.
The question for investors now is what sort of companies stand to benefit the most as Fed stimulus exits the system?
When the Fed begins to tighten money supply and remove liquidity, equity investors will likely transition from favoring low-quality companies to higher-quality ones. Quality seems like a simple concept; however, it is not as easily defined as other investment terms such as valuation or relative strength. There can be many aspects to quality, and a comprehensive investment process should attempt to analyze and invest in multiple dimensions.
Moreover, not all quality stocks are created equal. In a potentially rising-interest-rate environment, investors should look for these five indications of quality:
It’s a sign of a volatile day when Puerto Rico’s admission that it can’t pay its debts is only the second-most pressing debt issue in the news. Much of the world was again watching developments in Greece, which took a turn for the worse this weekend after Greece’s prime minister unilaterally decided to put the matter of Greek concessions to a referendum. Stocks started off in the red and dug deeper as the session dragged on.
The Dow sank 350 points, its biggest point drop in two years, with all of its 30 components retreating; the S&P 500 Index tumbled 43 to turn negative for the year; and the Nasdaq was dragged down 122 points, or 2.4%. Decliners led advancers by more than nine to one on the NYSE and more than six to one on the Nasdaq. The prices of Treasuries strengthened. Gold futures gained $5.80 to close at $1,179.00 an ounce, and the price of crude oil sank $1.30 to settle at $58.33 a barrel.
In Other Business News:
On Saturday morning, Greece’s prime minister surprised negotiators (including his own) when he called for Greeks to go to the polls on July 5 and vote on whether Greece should accept the measures proposed by the European Central Bank (ECB), the International Monetary Fund (IMF), and the European Commission. Now, Greek banks and financial markets are closed for an extended holiday until the referendum results roll in. In the meantime, Greeks are limited to withdrawing 60 euros per day, to the extent that Greek citizens haven’t already withdrawn their deposits.
History doesn’t repeat, but it does rhyme, so when I brace for what might happen in the markets, I think back to the 2013 bailout of Cyprus’s financial system. On St. Patrick’s Day weekend 2013, it was announced that depositors at Cypriot banks would lose money—both insured and uninsured depositors. On March 25, the Cypriot government agreed to a bailout package. Perhaps the Greece timeline will look a lot like Cyprus’s, so perhaps it would be helpful to review what happened when Cyprus found itself in similar straits: