Sheepish Algorithms

The stock market posted its first 4-day winning streak since January. The S&P 500 last week fell as much as 4 percent from its all-time high, and has since recovered to trade within 1 percent of its record set in May. The S&P 500 and the Dow are up 3 percent over four sessions, while the Nasdaq Composite has added 4 percent.

The United States and other world powers reached an agreement with Iran that calls for limits on Tehran’s nuclear program in return for lifting economic sanctions that have crippled Iran’s economy, enabling the oil-rich nation to ramp up its energy exports, access international finance and open the doors to global investors. Full implementation of the agreement will likely take months and is contingent on the pace at which Iran meets its obligations. The deal will keep Iran from producing enough material for an atomic weapon for at least 10 years and impose provisions for inspections of Iranian facilities, including military sites.

Oil prices initially dropped when the Iran deal was announced, but then prices climbed higher. The oil markets were not surprised by the news announcement, and a deal was clearly already priced in; and it will take some time before Iran has a big impact on supplies. Iran doesn’t have great reserves of crude oil supplies to throw on the market. Tehran has stored around 25 million barrels of oil mainly consisting of condensate. Iran will have to invest heavily in infrastructure; they will need to attract investment, sign commercial contracts and figure out the other logistics needed with producing and exporting oil. If the deal holds, look for Iran to deliver more supplies by 2016, possibly pushing prices lower. Even so, this represents opportunities for the Big Oil firms like Exxon Mobil Corporation (NYSE:XOM), Total, Royal Dutch Shell (LONDON:RDSa); also, oil-field service companies like Schlumberger NV (NYSE:SLB), Halliburton (NYSE:HAL) and Weatherford International Ltd (NYSE:WFT); also tanker companies; also big banks should do well with financing deals, but only the biggest banks such as JPMorgan Chase & Co (XETRA:JPM), Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS).

The director of international affairs at National Iranian Oil Company, said, “We will try to maximize our crude export capacity to Europe and restore 42 to 43 percent share in the European market before the sanctions were imposed.” This is an interesting sidebar. Since the Russian invasion into eastern Ukraine, Europe has been dealing with the threat of Russia cutting oil and nat gas. Iran now steps up as an alternate energy source. Iran holds the world’s fourth-largest proved crude reserves and the second-largest natural gas reserves. So, Europe might be a winner in today’s announcement. The bottom line is that today’s announcement means the oil market will be over-supplied for a long time.

Prime Minister Alexis Tsipras appears to be facing open rebellion in his coalition as he attempts to push creditor reforms through Greece’s parliament ahead of Wednesday’s deadline. With dozens of MPs in Syriza threatening to defect, Tsipras will need the support of the opposition to pass the €86 billion-euro package, putting the future of his government in doubt. Meanwhile, Athens missed another payment due to the IMF late Monday. The Greek deal does not include debt relief, and this might be its fatal flaw. The other flaw is continued insistence on austerity, which has not worked. Austerity measures are primarily aimed at shrinking debt as a proportion of a country’s economic output, a measure known as the debt-to-GDP ratio. Even if total debt is reduced, the debt-to-GDP ratio can rise because gross domestic product shrinks in tandem. So, Greece still faces the same problems they faced a month ago – their debt burden is unsustainable.

In the first meeting with investors since calling its $72 billion debt pile “not payable”, Puerto Rico said it was still premature to discuss how creditors would be affected, but made the case for a restructuring. Puerto Rico bonds are held by many U.S. investors, who bought the securities because they’re tax-exempt nationwide and offered higher yields than comparable debt.

After a month-long rollercoaster ride, China’s stock market is showing some signs of stabilizing, suggesting Beijing’s bundle of support efforts are having the intended impact. Last week, Chinese officials allowed more than half of all listed companies to suspend their shares from trading and prohibited major stakeholders from selling at all, pushing the Shanghai Composite up 13% Thursday and Monday. Chinese stocks are down 24% from their mid-June peak.

China accounted for 38 percent of the global growth last year, up from 23 percent in 2010. It’s the world’s largest importer of copper, aluminum and cotton #2 and the biggest trading partner for countries from Brazil to South Africa. If China slows down, the demand for industrial commodities goes down. That can have a huge impact on the global economy.

Retail sales fell an unexpected 0.3% in June as consumers pulled back on car, home and clothing purchases. It was the first drop in monthly retail sales since February and comes after an uptick in May initially pointed to a stronger spring. May retail sales were revised lower, however, to an increase of 1% from an initial 1.2% estimate.

Households cut spending on a variety of goods and services, including cars, clothes, home furnishings, and dining out. Americans also spent less online and shelled out less cash at do-it-yourself and building-materials suppliers. The decline in auto sales was expected because dealers had already posted lower sales after a huge month in May, but the rest of the report was disappointing. Only department stores, consumer-electronics outlets and gasoline stations posted sold sales gains; and the improvement at gas dealers owed mostly to higher fuel prices last month. If gas stations are stripped out, retail sales fell an even sharper 0.4%.

The prices the U.S. paid for imported goods fell a seasonally adjusted 0.1% in June, marking the 11th decline in the past 12 months. Excluding fuel, import prices declined by 0.2%. In the past 12 months import prices have dropped 10%, mostly because of a lower oil costs. Import prices are down a smaller 2.3% excluding fuel in the same span.

U.S. homes are today less likely to be in the foreclosure process than at any time since the Great Recession started. According to Corelogic, about 1.3% of all mortgaged homes were in the foreclosure process in May — the smallest share since the end of 2007, when the downturn started.

Small-business owners weren’t cheerful about economic conditions in June. The National Federation of Independent Business’s monthly small-business optimism index dropped 4.2 points to 94.1, the lowest point of the year so far. Small-business owners said they planned to spend less and had weak expectations for sales and business conditions. Small-business owners were less optimistic about the prospect of making new hires, investing in their business or expecting growth in June. The report concludes that, “While this is not a recession signal, it is a clear sign that economic growth on Main Street is not set for a strong second half.”

Earnings reporting season kicks into high gear this week. This morning JPMorgan Chase (NYSE:JPM) reported earnings that beat estimates. Wells Fargo (NYSE:WFC) reported profits that matched estimates, but revenues that missed. Johnson & Johnson (NYSE:JNJ) posted better-than-expected second quarter profit and adjusted its full year outlook higher. CSX (NYSE:CSX) reported profit rose 4.5% during its latest quarter, though falling coal volume weighed on revenue, which retreated 5.5%. Yum Brands posted better than expected results, mainly on the strength of international sales.

Also this week, look for reports from Intel (NASDAQ:INTC), Google (NASDAQ:GOOGL), Netflix (NASDAQ:NFLX), GE, Bank of America (NYSE:BAC), Goldman Sachs, and Citigroup (NYSE:C) – just to name a few.

China’s Tsinghua Unigroup has submitted a $23 billion bid to buy out U.S. memory-chip maker Micron Technology (NASDAQ:MU); it works out to a 19% premium over Micron’s closing price on Monday. Tsinghua Unigroup, China’s largest state-owned chip-design company, already has several links to major U.S. companies. It acquired a controlling stake in Hewlett-Packard’s China networking-equipment unit in May. Intel bought a 20% stake in Tsinghua Unigroup last year for $1.5 billion. Micron, based in Boise, Idaho, is the last remaining U.S. maker of the widely used chips known as dynamic random access memory, or DRAMs. It is No. 2 behind Samsung Electronics (KS:005930) in that market, and makes flash memory used to store data in mobile devices such as smartphones. Look for the Department of Justice to intervene in this deal.

Remember the flash crash in the Treasury market back on October 15th? Actually, it was a melt-up in prices that sent the yield on the 10-year Treasury from 2.19% down to 1.86% in a matter of minutes. The US government released its report on the day’s dramatic swings. The main culprit – algorithms. Primary trading firms accounted for more than 50 percent of the total trading volume in both cash and futures markets for US Treasuries on Oct. 15. That proportion is not unusual, according to the report, but what is remarkable is their level of activity on the day. Most of their trading is done almost automatically by computers running algorithms. As trading began to heat up, these algorithms essentially fed on each other, causing the amount of “self-trading” undertaken between different arms of the same PTF firms to increase. The computers performed like so many sheep, just following the herd. The problem might have been worse, if humans hadn’t stepped in, some simply pulled the plugs on their trading machines and order was restored.