Stocks fall, you go on the Internet, and news site after news site reports that the possible bankruptcy of Greece is pushing stock prices down. Throw in a few pictures of Greek police using tear gas to deter a crowd of 20,000 at Greece’s Parliament House, as they protest against Greek austerity measures, and the story becomes believable.
Yields on Greek bonds have hit 18%. Their Greek Prime Minister is willing to quit if it helps get through the cuts in spending that Greece needs to qualify for an international bailout.
Sounds like a good story. But let’s put this picture in perspective:
The total Gross Domestic Product (GDP) of Greece is $330 billion. That’s less than 10% of the GDP of Germany and miniscule when compared to the U.S.’s GDP of $14.0 trillion.
If Greece defaults on its debt, the exposure to American banks would be approximately $40.0 billion, a number already discounted in the share prices of the bank stocks with the most exposure to a Greek default.
Hence, in this economist’s eyes, the “Greek Crisis” has very little to do with the recent stock market weakness.
Three things are going on with the market, in my opinion.
The first is simple profit taking. After rising almost 100%, the traders who enjoyed the rally in stocks for 27 months are taking some chips of the table. It’s that simple.
Second, Wall Street is playing the Fed again. Wall Street loved QE1 and QE2. But the Fed has failed to announce plans for QE3. What a great opportunity to push stock prices down to force the Fed’s hand.
Finally, too many investors and analysts turned optimistic and bullish on May 2, 2011, when the Dow Jones Industrial hit a post-crash intraday high of 12,876. Latecomers to the market got punished and the bullish sentiment has slowly been withdrawn.
Michael’s Personal Notes:
It’s a funny stock market…
The gains the market made on Tuesday, the market gave back on Wednesday. The Dow Jones Industrial Average was down 178 points yesterday. But when I went to check the prices of my gold stocks at the end of the day yesterday, they were up again!
What this tells me is that the junior and senior gold-producing stocks are putting in a base here. If you feel you’ve lost out on the gold bull market, or if you are looking for an opportunity to buy more gold-related investments at cheaper prices, we’re near the bottom here.
Where the Market Stands; Where it’s Headed:
Important: According to Investment Company Institute in Washington, investors pulled $5.46 billion out of stock mutual funds last week—the biggest withdrawal of money from stock mutual funds since the week ended December 8, 2010.
Where did stock prices go after December 8, 2010? From the period December 8, 2010 to May 2, 2011, stocks rose 12%. Investors took money out of the market…and the market rallied.
Given investors fleeing stocks and given stock advisors being at their most bearish position since September 10, 2010, I believe we have just undergone a correction in a primary bear market rally and that this oversold market will surprise on the upside.
What He Said:
“Bonds could now be a buy: Bonds rise in price when interest rates fall, as their return makes them more valuable. After a bear market in bonds that has lasted for months, the action in the bond market, as I read it, indicates that the bear market in bonds could be over. I’ve always preferred quality when buying bonds, going with government bonds over corporate bonds. If you have some cash lying around, bonds could be a great deal.” Michael Lombardi in PROFIT CONFIDENTIAL, July 24, 2006. The yield on 10-year U.S. Treasuries fell from five percent in the summer of 2006 to 2.4% in October, 2011—doubling the price of the bonds Michael recommended.