Greece Gets A Reprieve And Stocks Hit New Highs; Russia Gets a Downgrade; Time To Buy Gold?; Oil Falters; Acadia BioPharma (ACAD) Surges; Ruckus Wireless (RKUS)
Europe/Greece – Kick The Can Down A Dirt Road – What Happens If Greece Leaves The EuroZone?
Vito Ricanelli, writing in this weekend’s Barron’s, says “Greece gave investors a gift [late in the trading day Friday], and stocks stormed to new highs,climbing more 154.67pts. in last 45 minutes of the trading day — as the debt laden country and its EuroZone (EU) creditors reached an agreement Friday on a four-month extension of its bailout package.” As he notes, “stocks were headed for a loss until rumors of an accord began to swirl Friday; and, after better European growth data released earlier in the day”
“The verbal warfare between Greece and Germany weighed on the market.” earlier in the week, but, news of a four month reprieve sent stocks surging in the last forty-five minutes of the trading day. “The deal is just an extension,” notes Milton Ezrati, Market Strategist for Lord Abbet, but, “the sense right now is that Europe is going to pull it off,” and keep Greece in the EU.
For the week, the DOW rose 121pts., or 0.7 percent, to 18,140; while the S and P 500 climbed 13pts. or .61 percent, to 2,110; and, the NASDAQ was once again the star, rising 62pts., or 1.3 percent to 4,956. For the year, the DOW is +1.78, while the S and P is +2.5 percent, and the NASDAQ is +4.64 percent. The DOW closed Friday up more than 150pts., it’s first record close for the year; while the S and P had its third record close in 2015, while the NASDAQ closed within 50pts. of its all-time record of March 2000 — some fifteen years ago. It was the NASDAQ’s eighth consecutive rise, the indexes longest winning streak since February 2014, wrote Corrie Driebusch in this weekend’s Wall Street Journal.
What Would Be The Consequences Of A Greek Exit From The EuroZone?
The conventional wisdom on the street had been that Greece really didn’t matter all that much….that it was ‘different’ this time, that European banks are in much better shape to absorb Greece exiting the EU. But, Friday’s 154 gain says otherwise; and, if the Greek deal goes south, it is hard not to envision the opposite happening to global equities — including the U.S.
The German newspaper magazine, Der Spiegel, has an article out today, speculating on the consequences of a Greek exit from the EU. First, Greece would have to “circulate a new currency overnight, that would immediately depreciate against the Euro,” the magazine notes. And, “at least initially, it would result in chaos, Banks would totter dangerously, interest rates would quickly climb; and, companies would go bankrupt. The number of insolvencies would rise by 50 percent in 2015; and again, by an additional 30 percent in 2016, predicts Ludovic, the Chief Economist for Credit Insurer Euler Hermes. Even Greece’s largest electricity company, state-owned PPC, would likely go bankrupt, predicts the ratings agency…Standard and Poor’s.
“In order to prevent people [or dissuade them] from making a run on the banks, Greece would have to introduce controls on money flows — at least temporarily. Transfers abroad would be banned, limits would be placed on withdrawals from automated teller machines, and supplier contracts would be suspended. It’s possible that medicines and food products would only be available on the black market, and that they could be purchased only with hard currencies.”
“One potential consequence of the devaluation would be that Greek government debt would rise from the current level of 175 percent of gross domestic product…to 230 percent, analysts at Germany’s Commerzbank believe. Athens would no longer be able to service the debt on a large portion of its loans; and, at least partially insolvent,” Der Spiegel wrote.
“It is difficult to predict how people would respond to such a situation. Argentina’s declaration of bankruptcy in 2001, was followed by violent riots and looting. The Argentina example shows how long it can take for an economy to recover from a crisis like that. Tens of thousands of Argentinians, many of them well educated, left their country, and many Greeks would do the same. The faith of international investors would also be shaken. Ir is likely the Greek government would have difficulty raising money for years to come,” Der Spiegel warns.
Not everything would be negative The new Greek currency, whatever it is, would be much cheaper/weaker, Der Spiegel notes, making Greek exports much cheaper; and, tourists might find a Greek vacation attractive because of depressed prices and, the Greek government could print as much money as it needed to finance the promises it made during the most recent election campaign, Der Spiegel observed.
With respect to the EuroZone itself, Der Spiegel contends that a “Greek exit from the EuroZone would be manageable, and the European Central Bank would use all measures at its disposal to defend the currency union. But, countries that have lent Greece money during these trying economic times, would suffer insolvent loans; but, Der Spiegel argues that writing off these loans wouldn’t be as bad as they appear, as Greece has done little in the way of repaying them in recent years.”
“The political damage/costs, would be much greater,” Der Spiegel forecasts. “A Greek exit would represent a significant political defeat for European leaders. For the last five years, they have tried to keep Greece in the EuroZone, at almost any price. Were the country to leave the EU, there is a danger that it could begin to orient itself more toward Russia and China.”
“In the final analysis,” Der Spiegel writes, “leaving the EU would be an almost incalculable economic risk for Greece; but, one which could pay political dividends. The reverse is true for the EU. And such, it is hardly surprising that cracks have become apparent in the Greek facade in recent weeks. Greek Finance Minister, Varoufakis, for example, has made several concessions to his European counterparts, only to see his Prime Minister withdraw them again.”
Although overlooked, or not mentioned by Der Spiegel, Germany, would also likely take a hit economically, if Greece were to leave the EU. By keeping Greece and the other economically challenged countries in the EU’s southern periphery, the value of the Euro versus the dollar and other currencies — is kept ‘artificially’ depressed. Were Greece to leave the EU, the Euro may initially weaken because of the chaos that might ensue; but, shortly thereafter, the Euro would likely strengthen — thus making German exports less competitive.
And, a Greek exit would be a watershed moment for Europe, as the idea of a single EU and currency would be gone — and, set the stage for other poorer countries to leave the EU as well.
And, it is hard not to see global equities, including the U.S. stock market — also not taking a nasty hit. Having some kind of position in gold may not be a bad idea, going into next week. More on that later.
Russia Gets Second Downgrade From Moody’s On Ukraine And Oil
From Moody’s to Russia….without love. Boris Korby and Olga Tanas, writing in Friday’s edition of Bloomberg News, report that “Russia’s credit rating was cut below investment grade by Moody’s Investment Service, which joined Standard and Poor’s in ranking the country’s debt as junk, citing the conflict in Ukraine and plunging oil prices. Moody;s downgraded Russia’s debt to Ba1, the highest non-investment level; [in line with countries including Hungary and Portugal] and a negative credit rating outlook.”
“The existing and potential future international sanctions, the erosion of the country’s foreign exchange buffers; and, persistently lower oil prices, plus high and rising inflation….will take a negative toll on incomes, as well as business and consumer confidence,” Moody’s said in their Friday report. “While the fall in oil prices, and the exchange rate have reversed somewhat since the start of the year, the impact on inflation, confidence, and growth is likely to be sustained.”
“Downgrades to junk from at least two ratings companies, may force money managers whose investment guidelines prohibit them from holding debt rated below investment grade, to sell as much as $5.8B of Russian dollar and local bonds,” according to a January report by JP Morgan Chase. “Most bond funds, which have rules against investing in non-investment-grade securities, will have to sell bonds…regardless of whether they want to do so, or not,” said Slava Smolyaninov, a Strategist at UralSib Capital in Moscow. “Investors will re-evaluate Russia; and, regard it as more risky. As a result, risk premiums will be higher.”
And, now the so-called ceasefire between Ukraine and Russia — doesn’t appear to be worth the paper it is written on. Before the ‘ink’ has had a chance to dry, there is credible reporting that intense fighting has resumed. And, a free Ukraine is in danger of once again falling under the ‘control’ of Moscow. Couple this news with a Greek exit from the Euro, and I think U.S. stocks may be in for a rough go in the short-term – unless these unfolding crises turn out better than they appear at this point.
Golden Opportunity? Oil Falters
With Russia/Ukraine heating back up, and a potential Greek exit on the horizon, investors and traders may start to seek some safety in precious metals — especially gold — in the coming weeks. Gold fell Friday as stocks rose on the news that Greece had been given a four month reprieve on reaching a debt bailout agreement with the EU. Spot gold was down 0.7 percent to $1,199 per ounce, and ended the week lower by 1.6 percent, and closed at its lowest in six weeks, to $1,197. U.S. gold futures for April delivery was negative by $2.70, to $1,204.90; but, swiftly declined on Friday afternoon’s news of a four month Greek extension, down $8, to 1,199.50 per ounce in after hours trading.
Carter Worth, Chief Market Strategist at Sterne Agee, believes it is time for investors to consider having an investment footprint in gold. He recommends either Newmont Mining (NEM), or the gold ETF, GDX. There are no guarantees, make sure you have the stomach for this — investing in precious metals and gold is far from a certainty. Having said that, I think I will probably get a small investment footprint in GDX next week.
Meanwhile, West Texas Crude (WTI) fell $1.02, or -1.97 percent, to $50.81; while Brent Crude closed flat at $60.10. The giant energy consulting firm, Baker Hughes released U.S. and Canada rig count figures Friday afternoon, and once again, we saw a decline, though not as many as had been forecast, The number of oil rigs in the U.S. fell by 37, from 1,056 last week to 1,019 on Friday. Down 37 rigs was the smallest weekly drop this year. The U.S. rig count has now dropped by 461 in the past twelve months, the most in nearly thirty years.
Despite these closures, it would seem that only the less productive rigs are being shuttered, and thus far, production has not suffered all that much. As Steven Schork said Friday on CNBC, “we [the U.S.] hasn’t seen this much oil since the 1930s; demand for crude is at its seasonal low point; demand is still well below average; and, he doesn’t see much positive change in oil prices till mid-2016. Mr. Schork, who is the Founder and Editor of The Shork Report, an influential investment firm which provides “comprehensive technical and fundamental daily views of the energy, cash and derivatives market,” said he thinks oil is going lower, to at least in the $40s, and perhaps even the $30s before it bottoms. If he is right, and the EU imposes more sanctions against Russia — we could see social unrest in Russia in the not too distant future.
Acadia BioPharma (ACAD) Surges, Ruckus Wireless (RKUS)
Acadia BioPharma (ACAD) which I own shares in, and have written about many times on this blog, had a stellar week, rising $4, or +11 percent, to close Friday at $37.45. Shares rose Friday by 66 cents, or 1.78 percent. I bought more shares in the company on Thursday morning. This is a critical year for the company and potentially a blockbuster year — if the company receives FDA approval for — Pimavaserin — that is in Phase III development as a first-class treatment for Parkinsons disease psychosis; and, in Phase II development for Alzheimers disease psychosis; and, has completed a Phase II trial as a co-therapy for schizophrenia. It also has clinical-stage programs for chronic pain, and glaucoma — in collaboration with Allergan, and two, advanced, pre-clinical programs directed at Parkinson’s disease and other neurological disorders. But, the key for 2015 is Pimavansein. The FDA is expected to rule before the end of this year on whether the drug will get a thumbs up for a New Drug Approval (NDA). They way the stock has been moving steadily upwards, suggests investors think it will. I do as well There are no guarantees, so do your own due diligence and homework. I may buy more next week.
One other company I am considering is Ruckus Wireless (RKUS), whose shares closed up Friday, 64 cents, or +6 percent, to $11.48. The Sunnyvale California-based company provides carrier-class WiFi solutions to service providers and enterprises worldwide. It also provides gateways, controllers, and access points with related software and services. According to the company’s website, the company offers SmallCell Gateway, a carrier-class platform to support and manage its Smart WiFi access points, as well as for the integration of WiFi and other services into service provider network infrastructure. I will probably get an investment footprint in the company next week. All for now. Sorry for the length. It was a target rich environment. V/R, RCP