Stocks started the week in a bullish mood with the indexes up some 1.5% earlier in the day. Given the current circumstances I believe this is nothing more than a relief rally and will not last as the investment environment is deteriorating quickly.
5 reasons today's rally will not last:
- Greece is basically at the point of falling apart regardless of the outcome of the latest elections on June 17th. In addition to the 30% of deposits that have fled the country's banking system (and flight is accelerating) since the crisis began two years ago, now Greek firms cannot even get temporary credit from their trading partners. It is just a matter of time before all liquidity dries up in Greece and a default and exit from the euro ensues.
- Spain just has had to pump in another 19 billion euros into Bankia. Given this is just one of many banks that needs capital, it is hard to see how Spain can come up with the necessary funds to recapitalize its banking system. Banco Santander (STD), probably Spain's best capitalize bank is down more than 5% today despite the rally. In addition, Spain's regional governments like Catalonia are facing liquidity issues. The spread of Spanish/German is also at all-time post-euro highs.
- The Euro continues to fall and has crashed through the $1.25 mark and is down some 6% in a month. This is a vote on non-confidence in the currency, and it also negatively impacts American exports and the earnings of U.S. Multinationals.
- The debacle that is Facebook (FB) continues. The stock is approaching $29 a share, down some 30% since its debut. This is undermining small investor sentiment and taking other social media plays like Zynga (ZNGA) and Groupon (GRPN) down with it.
- Next week's May jobs report is likely to disappoint again. Consensus is calling for around 150,000 jobs created. However, I think the result is likely to be similar to April's report which highlighted how an early spring accelerated hiring in the first quarter and "borrowed" growth from the second quarter. This is likely to continue in the May report and economic indicators have gotten weaker since the last report as well.
Be careful out there
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
