Archive for May, 2012

Greek Impact: A Traders Perspective

There has been a great deal of talk recently about this being a good time for the Euro Zone to move Greece officially out of the European Union. Some economists, analysts, and politicians seem to think that the impact of this action would be limited. Their argument is that Greece’s economy is so small in a Euro Zone perspective (let alone a global perspective) that Greece leaving or being kicked out of the European Union would be meaningless and will create no measurable impact.

They are correct but horribly wrong. This is because they have not considered looking at this situation from a trader’s perspective. If Greece leaves the EU, we can expect interest rates in Greece to skyrocket. This would be due to the fact that Greece would now be out there alone and no longer shielded by the EU’s protective umbrella. Greece’s real impact would then be felt. The path that Greece followed would become a blueprint for traders to attack other EU countries with debt problems.

Watching Greece’s interest rates rise dramatically would get a trader like me thinking. If this is what is happening to Greece then maybe I should start to sell Spanish bonds and Italian bonds with the expectation that rates would begin to rise in those countries. If the rates went up high enough then those countries might have to leave the EU also. If that happens then rates will really rise and bond prices will collapse making me a whole hell of a lot of money!

This is my real worry. In a sense, this situation would be equivalent to the run on the banks and brokerage stocks in 2008 here in the US but this would be on a country level. Remember back when the US Government allowed Bear Stearns to go under? Almost immediately Lehman Brothers and Merrill Lynch and others became targets of short-sellers hell bent on driving their stock prices down to zero.  One by one, these companies went under. Could we see the same type of thing occur in the European Union? If we do, I guess many people will have to retract their statements concerning Greece’s lack of importance and impact.

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Nowhere to Go

Many investors have been asking themselves when this market is going to sell off. We see an economy that is doing poorly and has been performing poorly over a considerable period of time! We have been receiving bad economic data over the last few months and this earnings season has seen many companies put forth negative outlooks for the next coming quarters.

Further, the indexes have all displayed technical breakdowns through the 50 day SMA and at least one significant flat line support. The charts really look bad at this moment…….yet the market overall still hangs tough. I too, am amazed at the current market action and it has made me change my normal approach to trading and investing. At times during the breakdown, things look so bad I hold back from buying stocks at levels that I would ordinarily jump at! Of course, the market turns and runs back up leaving me holding air as I missed my purchase opportunity yet again.

So the question is, ‘why is the market trading up against all the negatives around it?” There are a variety of reasons that contribute to the answer. First, there is absolutely nowhere else to put your money. Interest rates are so low that they are returning nothing! As a matter of fact, not only are they not providing a return, they are actually costing you money. The rate of inflation is higher than the interest rate you are receiving!

Second, everyone, everywhere else is having a problem that is as or more serious than ours. This is creating a situation where uncertainty is occurring globally and everyone is looking for safety.  Investors are looking to the place where they have the most confidence. Despite our rather large problems, the world continues to view the United States with confidence; the type of confidence that offers safety. Right or wrong, misguided or not, the world still sees the US Markets as the safest bet on the planet.

Finally, the last of the reasons why the market just does not seem to want to follow logic and go down is the old adage, bad economic news is good news for the market. There has been much speculation that if the economy continues to slow the Fed will step up and initiate another round of quantitative easing more commonly referred to as QE3. Lower rates and higher money supply often lead to higher stock market values and most likely will do so again.

So there you have it. The reasons for the market to go up are almost as good as the reasons for the market to go down. While I believe they are nowhere near as substantive  or as logical as the reasons for the market to go down, they are doing one hell of a job proving otherwise!