Reboot Greece

Since the latest “crisis” in Greece unfolded in the markets almost two weeks ago, I continued to offer that China was the real problem, but Greece was dominating the headlines. Greece doesn’t really matter in the grand scheme of things, economically or market-wise. And even though they struck an absolutely horrific deal for their country, stocks will rally in the short-term because the uncertainty is lifted.

Who in their right mind would agree to more tax hikes, more austerity and more pension cuts in a country spiraling out of control in an ongoing depression? The “deal”, once again, just Band-Aid’s the problem and kicks the can down the road. Greece needs D-E-B-T R-E-L-I-E-F, not more of the same which hasn’t worked since day one.

I have said this for years so you’re probably used to hearing it, but Greece needs to leave the Euro, default on their debt, issue drachmas and reflate without much in the way of imports. In other words, as the cable and PC telephone reps advise, they need to reboot. I keep hearing how Iceland is “different” because they have their currency, but I don’t agree. It’s similar. As bad as it got there, the recovery from  depression was sharp and steep and the world loaned them money again less than five years later.

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Rip Off the Band-Aid Greece

As the early tally in Greece showed overwhelming support for the NO camp, meaning they wanted to reject more austerity, markets around the globe braced for another round of strong selling. As usual, the pundits got it wrong. Almost every single interview I watched or read had the vote almost a dead heat. “Famed” investor Wilbur Ross laid a huge egg in not only predicting a YES vote, but also positioning his portfolios for it and then trying to rationalize that the overwhelming rejection of more austerity wasn’t as it seemed because “only” 60% of the country voted! The U.S. hasn’t seen 60% of eligible voters turn out for a presidential election since 1968!

Put yourself in the Greeks’ situation. Each and every bailout has come with more severe measures. Their economy continues to spiral in modern day depression. $266 billion in bailouts since 2010. Their debt/GDP ratio has climbed from 150% to 175%. Unemployment has soared to 26% overall and more than 50% in the under 30 market. Greek banks are essentially insolvent and almost out of cash. They have been closed for more than a week with no sign of reopening anytime soon.

Who would really vote for more of the same, but worse?

This process of kicking the can isn’t working and won’t work in the future. If the Troika (ECB, IMF, EC) really wants to bailout Greece or help them, there’s only one solution. Debt relief. Greece wasn’t able to pay its bill when this whole mess started and those bills continue to increase. At the same time, as the economy shrinks month after month, tax revenue declines which make the Greeks even more unable to pay their bills. Debt relief is the only solution if the Troika wants to keep Greece in the Euro.

However, with outright debt relief comes moral hazard. What would the Troika do with Italy, Portugal, Spain and France if and when they fall on harder times? Won’t they want the same treatment? And we all know how the northern countries including Germany, Austria, Belgium and Finland feel about living fiscally responsibly while the others do not.

I will repeat what I have written many times before. Greece should rip off the Band-Aid and leave the Euro. Circulate those drachmas sitting in the vault. Devalue the currency. Recapitalize the banks. Reflate. While the economy would likely plunge deeper into recession in the short-term with imports next to impossible, it should also begin a strong recovery sooner without the insurmountable debt anchor. Just look at Iceland. Less than five years removed from default, the world started loaning them money again.

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Greece = Opportunity. Stock Market Scenarios for Q3

With Monday’s blog and Street$marts being on the long side, I decided to wait a day to offer commentary on how the markets’ reaction to the impending default by Greece, bank closure, referendum, etc. would impact the new month and quarter. To reiterate an important market tenet of mine which has been around for decades, it’s not what the news is, but how the markets react. We are constantly reminded of that with economic news. Is good news bad news for stocks? Is bad news good news? Is good news good news? Is bad news bad news?

I have already written for years that my personal belief is that Greece should leave the Euro. If Greece was the size of Spain or France, the conversation would be very different as those countries are too big to fail and almost too big to save. Greece’s economic output and contribution to the Euro is barely noticeable. Their political system, while democratic, leans heavily socialistic and even more so than most of their European counterparts. Greece has a culture of tax avoidance, fiscal irresponsibility and gross overdependence on the welfare state. It’s not working now; it hasn’t worked in the past; and won’t work in the future. Talk about doing the same thing over and over and over, but expecting different results! That really is insanity!!

Turning to the stock markets, Monday’s negative reaction was for the part, as expected. The longer the “crisis” lasts, the more likely we are to see stocks begin to rally on bad news. That’s something to look for down the road and not here. For now, we have to expect volatility to remain elevated with much of the news occurring in the overnight hours. As such, we should wake up to large moves in the pre-market several times a week.

Getting back to Monday, the Dow plummeted 350 points which sounds like a large number, but keep in mind, it’s only a 2% decline. 2%! And at the end of that day, the Dow had pulled back a little more than 4% from its all-time, intra-day high in May as you can see from the chart below. For months, I have been in the trading camp, looking to buy weakness and sell strength until the March lows were at least breached. Monday’s low revisited those levels almost to the point, a tad disappointing for intermediate-term bulls like myself. I would much rather have seen those levels firmly breached to cause a short-term trap door and shake out some weak handed holders.

At the end of the day on Monday, however, we saw some truly extreme, short-term readings in a host of indicators.

  • 90%+ of the volume traded on the New York Stock Exchange was down.
  • 99% of the volume in the S&P 500 was down.
  • 99% of the stocks in the S&P 500 traded down on the day.
  • Less than 10% of S&P 500 stocks were above their 10 day moving average.
  • Volume in inverse ETFs spiked as traders hedged and braced for more downside.
  • Put/call option ratios soared as investors scrambled for downside protection.

The list goes on and on. Had stocks already been in real decline, you could have argued that Monday was a short-term panic and that the final low was at hand. However, it’s hard to make that case with all-time highs so close. Rather, this pullback looks like yet another single digit bull market decline in a long series during this most hated and disavowed bull market of the modern investing era.

For months, I have been waiting for stock market sentiment to at least get back to neutral from levels we typically see before 10%+ corrections and that’s finally beginning to happen. Although 20,000 has been my next target for some time, I cautioned that it is highly unlikely for that rally to launch with sentiment so skewed to the bullish side for so long.

However, just because we saw extreme readings on Monday doesn’t mean that the ultimate low was seen. I would argue against that. Monday’s snowball day was an important piece, but far from the final piece. Wash out readings like I listed above typically do not coincide with the final low. There is usually more constructive work to be done by price. If history is any guide, a few scenarios open up now as you can see below.

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I am going to offer three scenarios in order of likelihood. The first can be seen in green on the right hand side of the chart above. It has the current bounce petering out next week, followed by another decline below Monday’s low where the ultimate bottom is seen. Fresh all-time highs would be seen later this quarter.

The second scenario in orange shows a deeper decline below 17,000 on the Dow, which would probably result in calls that the bull market ended and some nasty, long-term bear market had begun. In fact, I heard one former “1998 guru” proclaim yesterday that the bull market is alive and okay as long as the Dow is above 17,038, but once that “magic” number is closed below, stocks are firmly in a bear market. That’s one of the dumbest comments I have heard in a long while and I certainly hear my fair share of ridiculous statements! As if a single point or points really matter. Give me a break! If the Dow does decline below 17,000 I imagine that bearish sentiment would skyrocket and exceed what we saw at the Ebola bottom in October 2014 and really give the market rocket fuel for a run to 20,000.

The scenario I did not offer on the chart was the most bullish one where stocks already bottomed on Monday and are slowly starting a rally to the upper end of the trading range we have been in since February. While it’s certainly possible, I believe it’s less likely because of the extent of the damage already done. Stocks need some time to repair themselves. Of course, when the market ignores the scenarios I offered and does its own thing, I will respond appropriately.

Summing it all up, Greece is a short-term issue and the news will most likely have the most impact as we sleep. Care more about how the market reacts to news rather than what the news actual is. Watch for spikes in bearish sentiment to set the stage for another leg up in the bull market. The bull market remains old and wrinkly but very much alive.

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Grexhaustion… Leave the Euro Already

If you weren’t already exhausted by the constant stream of headlines regarding Greece’s inability to meet their financial obligations, you should be now! After more than five years of negotiations, deals, posturing and extensions, the situation in Greece seems to be coming to a head. I hesitate to use the word “crisis” because unless you’re living there and feeling the depressionary pain, this is really a fringe story. What I find interesting is that we are finally seeing all parties involved dig their heels in to play tough.

Here is an interview I did late last week before the events unfolded. CNBC India

This isn’t another Lehman Brothers. I am not worried about contagion like sub prime mortgages in 2007. I don’t fear counter party risk like with AIG. Greece’s creditors are at the top of the food chain where bailouts aren’t needed.

I won’t rehash the past five years, but I have written many times that Greece has actually been in default more than they have been current in their obligations over their long history. This is cultural more than financial. For example, Greek citizens have a history of unprosecuted tax evasion. It’s accepted as business as usual. Their socialist system simply does not work. You can’t have a full pension retirement age of 57 when life expectancies continue to grow and your country has no means to pay those people.

Over the weekend, two significant announcements were released. First, the Greek government scheduled a referendum for July 5th on whether to accept the new “deal” offered by its creditors. This is a very bold and fascinating move by Athens, essentially abdicating the decision to its citizens who have protested the deals in mass. They reject austerity. They reject raising taxes. They reject raising the retirement age. They reject pension cuts and reform. What they want is old fashioned business as usual, which has about as much a chance of happening as I do of becoming six feet tall! I am currently 5’8″.

Besides the referendum, the Eurozone finance ministers refused to a one month payment extension and the European Central Bank (ECB) announced that they would not increase emergency liquidity measures for the Greek banks, essentially forcing their hands by saying enough is enough without further concessions. As you might expect, this caused an immediate run on the banks throughout the night and potential collapse in their entire banking system. And, as you might expect, the Greek government then shut down the banks at least until Thursday to stem the tide (NOT) and begin to put capital controls in place on withdrawals.

So, what we have is a very high stakes games of chicken between Greece and the Troika. Troika being the ECB, IMF and European Union.  Greece remains in a lose-lose situation. Continue to accept austerity measures and remain in a deflationary depression, which is a bit redundant. Or, tell the Troika to go pound sand, default on everything, leave the Euro and issue drachmas, which would send the country into some type of modern day inflationary spiral where imported goods would grind to a complete halt.

Neither option seems appealing, but if I had to choose, I would take the latter, somewhat like Iceland did six years ago, except they had their own currency. Their stock market collapsed 90% along with their banking system and economy. However, five years later, the world was already loaning them money again and the recovery was brisk.

The Troika fears Greece exiting the Euro because it sets the stage for other, much larger and more economically and financially important countries to leave, like Portugal, Spain and even Italy. That’s a story for later this decade.

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More Nonsense with Greece

Just wondering aloud if a single week can go by without any talk about will Greece or won’t Greece exit from the Euro. They are already in default, and historically, they have been in default more than they have been current, yet they behave as though they are in full control. Maybe they are! You know the old adage that if you owe the bank $100,000 and can’t pay, you have a problem. If you owe the bank $100,000,000, the bank has a problem. I don’t see it that way with Greece, but clearly, bad behavior is being rewarded.

The markets are once again celebrating the “news” with a big stock market rally. And the media loves it! What they don’t see or want to discuss is how poor participation is today so far. There aren’t even two winners for every loser. That shows some short-term weakness or lack of conviction. From my seat, it looks more like another short-term selling opportunity or do nothing over committing money to stocks right here and now. That time will come soon, but not now.

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Bears to Pounce at the Open

Stocks look to open sharply lower this morning on a variety of news events, although none that are singularly that bad. Greece is in the headlines yet again and frankly, if they are going to exit, let’s just get it over with. Their economy and market is not even a rounding error in the grand scheme of things, but a Grexit will open the door to the southern European countries saber rattling about an exit if they are not bailed out.

The open should put the major indices close to saying “hello” to last Thursday’s low, which is the line in the sand on a closing basis for the bulls over the short-term. On a day like this, I always look closely at which sectors lead and lag. I am most interested to see if the previous leaders are still leading or the previous laggards are still lagging.

I would fully expect to see treasury bonds and corporates rally today along with gold, REITs and maybe utilities. Tech should be under strong pressure given Microsoft’s big earnings miss. Most important, today’s close will be very telling.

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It’s All about Greece

Here is the clip from my segment on CNBC’s Closing Bell on June 15.  As is usually the case, my view is definitely the contrarian view and Bill certainly challenged me!

Take a look…

http://video.cnbc.com/gallery/?video=3000096597&play=1

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CNBC’s Closing Bell at 3:10pm June 15

I am going to be on CNBC’s Closing Bell with Maria and Bill at 3:10pm today discussing Sunday’s election in Greece and the potential for a major market reaction next week.

Here are some quick, off the cuff thoughts:

1 – Markets seem very comfortable rallying into the event, which makes me a bit uncomfortable. I would much prefer to see weakness and worry ahead of a geopolitical event to wash out the weak handed holders and then reverse after a day or so.

2 – The reliance on the Fed and other central banks is getting to an extreme mode, not that I would want to fight against the guys who own the printing presses.  The world is already awash in liquidity and absence outright money printing by the Fed and ECB, which I have a hard time believing based on a political outcome of a nation with the economic output of Indiana, might investors be disappointed after a day or so?

3 – It almost seems like whatever the outcome, stocks must rally.  That seems like dangerous thinking.

4 – Markets are coiled like a spring or snake for a sharp, fast move. If the move is lower next week, I think it sets up a decent buying opportunity.  If stocks break out to the upside, I think we could see 13,000 on the Dow and then a quick u-turn to the downside.

5 – Since QE1 was announced almost 4 years ago, I said and continue to believe we will see QEII, 3, 4 and 5 with the Fed’s balance sheet approaching $5 trillion.  I hope I wasn’t conservative!

I will be back next week with a full Street$marts issue.

Have a great weekend and Happy Father’s Day to all the dads!

Looking forward to an awesome US Open at Olympic.

Paul

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