Greece: Steering Nation Of The Markets

Includes: AAPL, DIA, QQQ, SPY, TLT
by: Efsinvestment

The U.S. and European markets are both suffering deep losses, with the threat of Greece returning to the drachma, as well as another pain in Spain looming. This month was such a nightmare for the Dow that it was almost always down. Both the Dow (NYSEARCA:DIA) and S&P 500 (NYSEARCA:SPY) had their worst monthly declines since November 2011. The Dow and S&P 500 are down by about 6% this month, while the Nasdaq (NASDAQ:QQQ) is down by 7% so far.

So, where on earth are the markets going? Will there be a turnaround? And when?

We all know that the European Union is having its worst days due to the Greek economy, a tumor that Europe suffers from. Now the most important question in today's world - does the Union have to cut it off or try healing it? As Greece is going for an election on June 17, the markets will get under real pressure day by day until that time. If the leftist Syriza party rises to power, it will be difficult for Greece to stay inside the eurozone perimeter and Greece might be forced to exit. As Syriza has denounced the austerity measures, European leaders will not be as decisive to keep Greece inside as now.

What happens if Greece gets out?

Greece is not sitting on oil reservoirs, or any other natural resources that can keep the country on foot. It doesn't have a sizable labor force or industry that can keep it alive. Greece relies mostly on tourism, and if there will be a return to the drachma, the new Greek currency will immediately lose more than half of its value. Even at the current time, there's a dramatic drop in Greece's tourism income. The country is already running out of cash somewhere in July. A euro exit will lead to a great decline in economic output, extreme unemployment rates, massive lack of liquidity and maybe, an uprising. Therefore, in my opinion a euro exit is a door to hell.

What comes after Greece?

Spain is already at the edge. One of the country's largest banks, Bankia, asked the central bank of Spain for a recapitalization. What's more, Spain is considering using debt to rescue Bankia, instead of cashing it up. Both Ireland and Italy might be added to the list. Let's hope Greece won't open the "season of big depression".

Besides, you don't need to have direct exposure to Greece or hold Greek shares to suffer from a global economic depression. There's hardly any point in avoiding anything Greek or somehow related to. When the downfall starts, it will pull everything inside like a black hole. In particular, financial stocks will be affected.

What about the States?

The U.S. markets are highly dependent on Greek elections, with stock-index futures rising on May 28 on news that the New Democracy party came first in polls. You can easily understand the state of the U.S. markets by simply looking at one stock - Apple (NASDAQ:AAPL). After turning the upside momentum downwards in April, the stock saw above-$600 levels for the last time on April 27. It was a considerable success for Apple to see even $570 a share on May 23 in such a catastrophic environment. As far as I see, Apple is moving independent of the U.S. markets. On the other hand, the Dow Jones and S&P 500 are suffering greatly from the European situation. As I've stated, the Dow has seen only four days that finished with a green arrow this month, for the first time in one hundred and nine years.

The markets will keep being driven by the problems in Europe, which will stretch nerves to limits, especially as the Greek elections come closer. Until that time, there's nothing to do. You can keep a close look at opinion polls and invest accordingly, of course.

Moreover, the Fed is the largest buyer of government debt, which resulted in higher prices and lower yields. Inflation fears are rising in the bond market as the Fed's Operation Twist is leading to an arguable easing in the U.S. dollar, and igniting inflation. If Europe somehow finds a way out and decreases its volatility, U.S. Treasuries (NYSEARCA:TLT) won't be able to avoid losing status as a safe haven. An added risk premium might push the nominal interest rates higher. Greece is the key for the entire global economy for now. Let's see how the Greek nation will steer the world's markets.

Disclosure: I am long AAPL.