Spartans, Prepare For Glory!

-Why Greece Matters 

Written by Keith Springer

May 25, 2011

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It appears the Greeks of today will only find glory the same as their Spartan ancestors: through intense conflict and ultimate death. In modern terms that means default, austerity and depression. In reality, this means little to the global economy as Greece wouldn't even be one of the largest cities in California. The problem is a contagion. Much like what happened in the US with Lehman Brothers. It wasn't that Lehman was so important on their own, it was that everybody was tied to them in some way. 

This has led Moody's and Fitch to announce that a restructuring of Greek sovereign debt would be considered a default and lead to further destabilization across Europe, stating that, "A Greek debt default would hurt other peripheral Euro-zone states and could push Portugal and Ireland into junk territory."  While the Greek government has moved to accelerate sales of state assets to raise 6 billion Euros, the leader of the main opposition party in Greece, in true Greek fashion in a hopeless fight to the death, has stated that he would oppose the latest round of austerity measures. Prepare for glory!

This has become so important to us at home in the US for 4 reasons:

1. As bad as things seem in the US, they're worse across the pond! This leads to...

2.  ...A stronger dollar. The Euro problems accompanied with the end of QEII will push the dollar higher. I discuss this in my commentary a few weeks ago "QE Mini-Me, The Dollar and Inflation." And of course, a stronger dollar...

3.  ...Has led to lower US stock prices, at least in this Fed stimulus bull market. However, there is one stealth issue which is that...

4.  ...No news is bad news. Now that we are now past earnings season and there is no more good news for stocks to push them higher until the next earnings releases start to pop up.

All of these issues are creating strong headwinds for stocks, but very good for bonds.

Investor Strategy: Pray for peace but prepare for war! 

Stocks still have some life in them and will surge once we get back into earnings season. Earnings is the main support for stocks and they are likely to be stellar next quarter. The concern however is the level of surprise. Positive earnings "surprises" are what pushes stocks higher, and there just aren't that many surprises left. After all, how many times can you take the same person to the same restaurant every year on their birthday and yell, "Surprise!" before they figure it out? Although, recent economic numbers have been disappointing. This may bring down earnings estimates and set the stage for more positive surprises.

The game changer will be if Bernanke and the Fed bring in another QE program once things slow down (which I believe they will!). This will be very good for stocks in the short term, but make the future crash more devastating.

Regards -Keith

P.S. If you have CD's coming due, cash earning little or other accounts that are underperforming, let me know. There are some great CD alternatives and I can still get yields over 8%.