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The market rallied 1.03% on Friday as the shorts were the weak hands going into the Greek elections on Sunday. The most heavily shorted, beaten down stocks like European banks +5-10% and ZNGA +11%/NOK +6%/FB +6%/RIMM +5%/NFLX +5%/FOSL +5% were up the most. No extended thoughts today.

Macro

-Michigan consumer sentiment 74.1 vs. 77.5 est., 79.3 prior. 5 year inflation outlook 2.9 vs. 2.7 prior. 1 year inflation outlook 3.0 vs. 3.0 prior

-Empire state conditions index 2.29 vs. 13 est., 17.09 prior. Employment 12.37 vs. 20.48 prior. New order 2.18 vs. 8.32 prior. Prices paid 19.6 vs. 37.35 prior

-WSJ practical guide to Greek elections Link

-Bloomberg Greek election scenarios Link

Stocks

-Digitimes reports Amazon to cut price of Kindle Fire to $149 Link

-EA is pulling development resources from the Google+ platform Link

-Pinterest is gaining large market-share of social ecommerce referrals from Facebook. 1% to 26% in one year vs. Facebook going from 88% to 60% Link

-Facebook CTO to leave Link

-Microsoft Xbox 720 strategy document allegedly leaks Link

The pre-market news flow was mixed again with a weaker than expected jobless claims number and company sales warnings from Lattice Semiconductor and Nokia. However after a modest open, the market started to go up on rumors that secret Greece polls were showing the pro-bailout Greece party was going to win this weekend. Alexis Tsipras then spoke at a big rally and promised again he would cancel the bailout if his party wins, but vowed to keep Greece in the Euro (have your cake and eat it too).

The market started to roll over in the afternoon, but then got an adrenaline spike higher on a Reuters report saying central banks were preparing coordinated liquidity action if the market shows signs of stress after the Greek elections. After some insane volatility, the market closed strongly up 1.08%.

Nokia’s warning is another one in a long string of recent negative pre-announcements and weak financial results. HTC and Research in Motion are not doing much better with repeated sales misses themselves. In the same vein of other markets like Coke and Pepsi or Visa and Mastercard, it sure looks like the global smart-phone market is turning into a duopoly between Apple and Samsung.

Markets tend to develop into monopolies and/or duopolies over time as the leading companies benefit from the economies of scale in the supply chain and network effects of their products.

May videogame sales were horrendous with software –32% y/y. In the past few months the results have been January –38% y/y, February –23% y/y, March –25% y/y, and April –42% y/y.

The current console hardware generation is getting long-in-the-tooth and the preponderance of cheap new and used quality games available for under $20 is hurting new game launch sales. Moreover people are spending more gaming dollars and time on their iPads, iPhones, and iPod Touches. I don’t see this trend turning around anytime soon as least until Xbox 720 and PS4 launch in late 2013. Wii U later this year looks dead in the water with no killer must have software in the launch pipeline.

With Germany blinking and giving Spain a bank bailout with no additional austerity concessions last weekend and the leaks we’re seeing this week, it’s crystal clear government leaders are petrified about the Greek elections this weekend.  I see three scenarios:

1) Greek pro-bailout parties win a decisive victory. The Intrade betting site says there is currently 65% chance of the New Democracy party winning.  If this happens, the bailout plan goes through and the can gets kicked for another few months before Greece needs another bailout, but in mean-time EU leaders wipe the sweat off their fore-heads and go “whew!” and they can party the night away at their resort in Cabo, Mexico.

2) Greek anti-bailout party wins decisively. If Alexis Tsipras then actually does what he promised and cancels the bailout on day 1, it puts Europe in a pickle. There would be a real risk of a Greece euro exit as politically it would be hard for Merkel to hand over hundreds of billions of funds with no austerity concessions.  It’s one thing to do it for Spain which is too-big-too-fail for Europe, but harder to do it for Greece which is probably in the long-run a black hole.

3) Neither party wins enough votes to form a ruling coalition like the last election. Then we’re back to square one and have to look forward to another election. This isn’t a great scenario either as the country is due to run out of money reportedly on July 20th, although it is unclear if Europe would shut off bailout funds if a government hasn’t been formed yet.

To add even more variability to the markets after this weekend’s Greek elections, the Fed has their meeting on June 19-20 (Tuesday-Wednesday) next week, where they may or may not announce new actions. Frankly I have no idea what is going to happen in the coming days. If you do, let me know.

Macro

-Jobless claims 386K vs. 375K est., 377K prior revised to 380K

-CPI –0.3% vs. –0.2% est., 0.0% prior. Ex-food/energy 0.2% vs. 0.2% est., 0.2% prior

-“Central banks are preparing for coordinated action to provide liquidity” according a Reuters source, a senior G20 aide Link

-Secret Greece poll rumors that say pro-bailout party will win Link

-Intrade betting site says there is a 65% chance the pro-bailout party will win in Greece this weekend Link

-Venezuela passes Saudi Arabia to hold world’s biggest oil reserves Link

Stocks

-Nokia cuts guidance again and announces 10,000 layoffs Link

-Lattice Semiconductor cuts Q2 guidance “continued weakness in the worldwide distribution channel, especially Europe” Link

-U.S. May 2012 videogame sales –32% y/y Link

-Switzerland’s Central Bank urges Credit Suisse to bolster capital Link

-June tablet web-traffic market-share. Apple iPad 91%, Barnes & Noble Nook 0.85%, Amazon Kindle Fire 0.71% Link Link2 Link3

The market opened down on an ugly May retail sales number and revision lower for April along with more profit warnings from companies like SKF AB (ball bearings) and Nucor (steel) citing weaker than expected sales in Europe.

The market then attempted to rally on more Texas Holdem bluff comments from Greece’s anti-bailout leader saying Europe would never dare halt funding to Greece even if they unilaterally halted austerity and the bailout.  J.P. Morgan also led the bank index and the market higher mid-day on cover-on-the-Dimon-testimony-event price action. Jamie Dimon also told CNBC Q3 and Q4 quarters will “be solidly profitable” to help the cause.

However the rally started to sputter as an EU official said one Spanish bank was “oriented towards liquidation.” Note this headline was later refuted by a Spanish government official (Link). The market then sold off harder on WSJ headlines like this one: “Greek Bank Deposit Withdrawals Have Averaged EUR600M-EUR900M/Day in Past Days.” Nothing strikes fear into the hearts of the longs than potential bank run headlines.

Even though the SP500 closed down 0.70% and the Russell 2000 down –1.2%, there was a lot of underlying carnage beneath the surface. I saw dozens of growth-oriented consumer and technology stocks down 3-7% on the day.

When the Spain potential bank liquidation and WSJ Greece bank run headlines hit the tape I saw my quote screen light up like a Christmas tree, the first time I have seen this type of major quote flickering activity in weeks. It meant some investors were jamming stocks on the news and are in jittery mood.

Macro

-Alexis Tsipras says Europe will not stop funding even if Greece cancels austerity Link

-Wall Street firms cut Q2 GDP forecast due to weak retail sales number Link

-Moody’s cuts Spain to one notch above junk Link

-Greek bank withdrawals accelerate Link

Stocks

-Swedish ball bearing maker SKF AB cuts guidance due to weak sales in Europe and Asia Link

-Steelmaker Nucor trims earnings outlook due to weakness in Europe Link

-TSMC says chip demand for 28nm is high. They will catch up to customer demand in Q4 Link

-Fidelity’s Danoff Contrafund is the best of the big mutual funds Link

-Fidelity portfolio managers are feeling the performance pressure Link

-Credit Suisse says Apple has a potential game changer in mobile payments Link

The market sold off for about an hour as Spanish bond yields went up to last November’s highs and an ECB governing council member said there is no discussion now about another round of LTRO. The market then rallied the rest of the day to close up 1.17%. Don’t ask me why the market rallied because I don’t have the foggiest idea vs. other days where there was news.

UPDATE: Looks like Alexis Tsipras, the leader of the anti-bailout party in Greece, wrote an editorial in the FT that leaked out intra-day that said he is fully committed to keep Greece in the euro-zone (Link). This probably helped the market.

As the chart above shows, the market has been very choppy the last few days. The volatility probably won’t wane as we go into quadruple witching options expiration day this Friday.

Michael Kors posted an impressive beat-and-raise quarter. Management said on their conference call they see no slow-down in their European sales due to macro concerns. They plan to open 40-50 new stores annually in North America with 20% comp store sales growth guidance and 10-15 new stores annually in Europe. The company also achieved the world record for number of “jet-set” luxury attitude utterances during a conference call at about 1,000 times.

I remember one of the more insightful things I heard during Goldman’s last conference call on April 17th on how they allocate capital: 1) "biggest thing that drives our risk appetite is our client flows" 2) second biggest driver their "traders on the line view of situation"

While you and I don’t have access to client flows information like Goldman prop traders do, you can get a general sense of what is going on by how the market trades and reacts to news flow. It pays to be cognizant what the big boys are doing and how they think.

Macro

-ECB governing council member, Jozef Makuch, said there is no discussion right now about another round of LTRO Link

-Syriza leader pledges to raise taxes if elected Link

Stocks

-Dell starts a dividend with a 2.7% yield Link

-Fusion-io announces an OEM deal with Cisco Link

-Microsoft reported to charge $85 per each Windows 8 tablet for the OS Link

-Scotts Miracle Grow lowers outlook on slowing lawn care and gardening trends Link

-Pershing Square Q1 investor letter Link

-JP Morgan CEO Jamie Dimon’s congressional testimony text Link

Tweet of the Day

Tweeted on May 2, 2012

After futures initially spiked over 1% higher Sunday evening on the Spain bailout news, the market sold off hard intra-day to close -1.26%. It was a bad day for all risk assets with semiconductors –1.65%, banks –1.82%, Russell 2000 –2.36%, and Nasdaq 100 –1.64%.

Although some profit-taking would be expected given that Reuters telegraphed the Spain bailout news early Friday morning, the market sold off even more than it was up on Friday. Fears include the potential subordination of Spain’s sovereign debt holders if the ESM funds are used for the bank bailout, Fed voting member Lockhart talking down additional easing in the short-term, chatter from Greek politicians wanting to renegotiate bailout terms similar to Spain, and a Reuters article saying that the EU are discussing worst-case contingency plans like capital controls and limiting ATM withdrawals if Greece exits the euro.

There was also some sell-the-news price action in technology stocks after the Apple developer conference keynote speech. One smart trader told me there was nothing “wow” about the Apple announcements today as everything was pretty much in-line with Street expectations. There were small spec upgrades to the two laptop lines, a new thinner “Retina display” Macbook Pro model, and feature updates for the next version of iOS (version 6).

Texas Instruments narrowed their guidance around the same mid-points in their mid-quarter update after the close.  The company stated business is tracking as they expected and also gave new average seasonality numbers for their new business model: Q1 flat q/q, Q2 +9% q/q, Q3 +6% q/q, Q4 –4% q/q.  Currently they are guiding to +10% q/q growth vs. the +9% of normal seasonality.

Macro

-Fed voting member Lockhart not convinced on additional easing yet Link

-New York Times Paul Krugman downplays the Spain bailout. He gets quoted on Italian TV saying there is a 50% chance of a euro breakup Link

-Greek Left (anti-bailout party) seeks to exploit Spain bailout for the election this weekend Link

-EU officials discussing capital controls if Greece exits the euro Link

-Spain’s CDS goes up on subordination fears after the bailout Link

-Fed says U.S. median wealth down 38.8% in 2007-2010 Link

-Goldman Sachs says there is a 75% chance the Fed will ease at the June 19-20 meeting. The firm says it’s a close call between a Twist extension or MBS/long-term treasury buys (Note: Goldman was wrong on their Bernanke speech call last week)

Stocks

-Facebook unique visitors growth slows to 5% y/y in April Link

After futures were initially weak Thursday night, Friday turned out to be a strong trend-up day with a 81bps gain. The market clearly benefited from a Reuters report in the morning which adamantly said a Spain bank bailout was coming on Saturday according to their EU official sources. This report turned out to be 100% accurate.

From the details we know so far Spain has received a commitment of up to a 100 billion euros, which will be channeled through Spain’s government bank-fund called F.R.O.B. (you can’t make this up) from either the ESM or EFSF bailout funds. Germany blinked as EU leaders were petrified about potential contagion effects to Spanish banks after the Greek election next weekend.

agreement needed to be reached before a Greek election on June 17 which could cause market panic and increase the threat of Athens leaving the euro zone if left-wing parties opposed to Greece’s EU/IMF bailout win” – Senior German official, Reuters

It looks like Spain will not have any additional austerity requirements as a part of this deal. There is a newspaper report (Link) that the Spanish Prime Minister told his finance minister to drive a hard bargain in the bailout negotiations. Allegedly he texted “Spain is not Uganda” because if Spain goes down the EU would have to pony up 500B more euros and another 700B on top for Italy.

Somewhere in Greece Alexis, the anti-bailout party leader, is smiling at this weekend’s events and Spain’s blackmail-type negotiation tactics.

Macro

-Initial Reuters report that the Spain bank bailout would come on Saturday Link

-EU’s official 2 page announcement document of the 100B euro Spain bank bailout Link

-Barron’s mid-year roundtable Link

Stocks

-Microsoft is cutting cloud storage transaction prices by 90% Link

-Report that iPad 2 is still 41% of iPad sales after the new iPad launched Link

-ChannelAdvisor May 2012 same-store sales numbers Link

The market closed around flat (-0.01%). In the pre-market futures rallied strongly on the news of China’s rate cut, but after it was clear Bernanke wasn’t go to signal any new stimulus during his speech the market started losing its gains. It culminated in a last hour sell-off after a weak consumer credit number, which brought the market back to break-even on the day.

Bernanke told Congress if the European situation got worse from a Greek euro exit, the Fed would act by lending to banks through the discount window against collateral, which would add liquidity to the markets. He was particularly cagey about further stimulus saying the decision hasn’t been made yet. One nugget I did hear from the Chairman was there are different options available, which opens the possibility of an extension of Operation Twist vs. doing the full-on MBS QE3.

Today’s price action after the speech was not good. If the market continues to sell off tomorrow, it would mean the rally the last 2 days may have been nothing more than jittery short-covering into today’s hope-event. Goldman Sachs was clearly wrong on their call earlier this week that Bernanke would hint about QE3 today.

Key dates in the short-term are options quadruple witching day next Friday June 15th. The very important Greek elections on Sunday June 17th. The G20 Summit on June 18-19th and the Fed meeting June 19-20th. Thankfully the Fed will have 3 days to analyze the implications of the Greek election results and possible side-effect contagion potential before coming to their decision on what to do.

Lululemon traded down 9% as the company guided down next quarter earnings a bit lower than their typical sand-bag guidance. Wall Street analysts were also not happy with management’s comments on the conference call of no revenue upside over the next 2 quarters due to a focus on developing new products and tougher compares.

Macro

-Jobless claims 377K vs. 378K est., prior 383K revised to 389K

-Bernanke offers few hints of Fed stimulus Link

-China cut borrowing costs for first time since 2008 Link

-Head of China’s sovereign wealth fund warns that the euro-zone could fall apart Link

-April’s consumer credit grew by $6.5 billion vs. $11 billion estimate Link

Stocks

-Virgin Mobile confirms they will offer no-contract iPhone with an unlimited data plan for only $30/month Link

-More hedge-fund returns for May Link

-Acer to release a new quad-core Android 4.0 7-inch tablet with 1 GB of RAM for $199 Link

-Flurry Analytics’ research shows developers are focusing on iOS for app development and the iPad is dominating tablet market share with 88% user session share vs. Amazon Kindle Fire’s 3% Link

The market rallied 2.3% today on continued strength in the financial and semi-conductor sectors. All eyes are on the Bernanke speech at 10AM tomorrow for any further stimulus hints as the other central bank, the ECB, did nothing this morning and kept rates unchanged.

Tempur-Pedic plunged 49% today as the company guided to negative sales growth for the quarter missing analyst expectations of 15% growth. Management said volumes were down, prices were down, and the level of promotional activity was much higher than they expected on the conference call.

In a stunning reversal for what may be the most expensive game launch of all-time at $150 million, Electronic Arts (Link) said they will open Star Wars: The Old Republic MMO to free players in July. Obviously a sign of a poor take-up in premium paying subscribers, it’s another example of the total strategy failure by the CEO, John Riccitiello. Unfortunately for EA share-holders, the curse of JR has struck again. See #7 in my Top 10 Predictions of 2012 blog post (Link)

Macro

-Stimulus is back on the table for discussion at the Fed according to WSJ’s Hilsenrath Link

-German and Spain officials working on finding a way to bail-out Spanish banks without being too punitive Link Link2

Stocks

-Tempur-Pedic cuts forecasts to flat growth. Stock gets crushed Link

-HTC cuts Q2 guidance by 13% due to lower sales in Europe Link

-Allianz RCM Tech Fund manager’s thoughts on Facebook Link

-Performance results in May by various hedge-funds Link

The market closed up 0.57% with particular strength in heavily shorted sectors like banks and semiconductors, two areas that noticeably lagged the market yesterday. The market had an up-trending bid almost the whole day as traders didn’t feel like selling into the government intervention “hope-events” of the ECB meeting tomorrow and Ben Bernanke’s speech on Thursday.

Coach management presented at the Piper Jaffray conference today. The company was less bullish in tone saying the “macro environment is uncertain” and U.S. consumer sentiment is “less sanguine” than 3 months ago. However they said the quarter is on-track with the caveat they have 4 more weeks to go.

Jon Winkelried, a former top executive at Goldman Sachs, spoke one of my favorite quotes on investing ever. In a Fortune article (Link) he said, “Lloyd [Blankfein] is a great student of markets. One of the things that he helped me understand is how sentiment is so powerful in driving markets and driving human behavior.”

I noticed that this quote has been extremely relevant in recent years. Market participants seem to like to move in herds. From one side of the boat to the other. It is absolutely critical to always keep track where we are in the sentiment cycle.

Macro

-ISM Services 53.7 vs. 53.6 est., 53.5 prior. Employment 50.8 vs. 54.2 prior

-Spain’s budget minister says their government is losing access to the financial markets Link

-John Burbank of Passport Capital reiterates his bearish market stance. Good details on how he is expressing his view are in this Bloomberg article Link

Stocks

-WSJ reports the Apple iPhone is coming to Virgin Mobile Link

-The Apple iPad dominates the tablet market according to the latest ChangeWave survey. Amazon Kindle Fire, not so much Link Link2

Macro

-May New York ISM 49.9 vs. 61.2 prior “Screeching Halt” ISM says Link

-Factory orders –0.6% vs. 0.2% est., –1.5% prior revised to –2.1%

-Goldman Chief U.S. economist Jan Hatzius says confidence in QE3 announcement during Fed June 19-20th meeting has grown. Also Bernanke may hint at QE3 during this Thursday’s speech Link

Stocks

-SEC approves new limit-up/limit-down system. Stocks will get halted if they move more than 5% within 5 minutes Link

-Facebook said to explore giving access to children under 13 Link

-Starbucks acquires French bakery for $100 million Link

-Interview with the founder of Dropbox Link

-Delta airlines misses revenue estimate by 1%. Stock falls 11.5% Link

The market closed about flat today. Nasdaq 100 names showed strength, while U.S. banks showed weakness. The market initially rallied in the pre-market on the hope Merkel’s meeting with Spanish officials would yield results and Goldman’s chief U.S. economist saying his conviction that QE3 is coming is higher. However after an awful New York ISM number the market sold off into Merkel’s “no new news” press conference a little after 1PM.

There are 3 key events in the next 3 days that may give hope for intervention sentiment at least temporarily. Tomorrow the G7 will have emergency discussions in their weekly conference call about the EU crisis. On Wednesday the ECB meets and may or may not decide to cut interest rates. And the QE3-is-coming posse is praying for a wink-wink this Thursday when Ben Bernanke speaks before the Joint Economic Committee in Washington.

I’m sure many of you have been watching and enjoying Game of Thrones on HBO. This market is in many ways a Game of Chickens. Alexis Tsipras is playing chicken with the EU threatening to cancel the bail-out if he is elected the next prime minister of Greece.  Germany is playing chicken with Spain and Italy asking them for more fiscal budget sovereignty control before contemplating euro-bonds. ECB is playing chicken with the EU leaders asking for a stronger fiscal union commitment before doing any more large-scale intervention. It’s a lot of jaw-boning and talk. Let’s hope cool heads prevail in the end.

The SEC approved a new plan (Link) that will replace the current circuit breaker system. In the new plan, stocks over $3 will get halted for 5 minutes if they move more than 5% within a 5 minute period. I hope this plan isn’t an example where the fix is worse than the original problem of the flash-crash. I can totally imagine during a market panic day some-day in the future, thousands of stocks halting every 5 minutes all at once. I wonder if that will be beneficial for investor sentiment given no-one will be able to have liquidity in that scenario.