Soos Global Cap...'s  Instablog

The article in this link is a relatively long read written by Satyajit Das, an author of several reference books on derivatives and risk mgmt.

If you don't have time to read the whole piece, suffice to say, that his title says it all: "The Euro-Zone Debt Crisis: It's Now ABOUT Germany, NOT UP TO Germany".

He goes into clinical detail on how Germany's role within the Eurozone is currently looking like a lose/lose proposition! The costs to Germany of either a breakup of the Eurozone or of an attempt to keep it together will be substantial….potentially coming in any number of a variety of forms depending on which road is travelled, including huge additional transfer payments, loss of exports, massive losses by German banks on foreign assets, and further deterioration on competitiveness.

The market, today, appears to be focused on a couple of 'trees' within a crowded forest….most notably, the 'tree of hope' that the QE3 is around the corner, the hope that yesterday's Bk of England safety net will be the model of several of central bank safety nets to come soon, and the hope that the Greek population will show up on Sunday to vote in the less extreme, more centrist parties who will be able to stick with former bailout agreements with only minor tweaks.

At this time, I'm not clinging to the 'tree of hope'! I remain concerned that:

1) US data is continuing to disappoint (evidence today's IP #, Empire State Mftg, yesterday's Jobless Claims, etc),

2) that Greece is a rounding error relative to the problems with Spain and Italy. Watch the bond markets…..both have pushed yields up to stranglehold levels! And not just there… even the so-called safe-haven German Bunds' yield has climbed of late!

3) As the article above points out, Germany appears to be in for a relatively rough ride regardless of how the Eurozone evolves.

4) In just a couple of months, we'll be focusing on the US "Fiscal Cliff" which is sure to be a slug-fest in Washington, with little certainty in the way of results, with one exception: market volatility!

So am I bailing out? No. The market has already retreated considerably in the past month or so with some very high quality companies off as much as 20% (or more!) from recent highs. With all the doom and gloom mentioned above, there are significant offsets in the positive camp….companies are in relatively good shape with low levels of debt and lots of cash…economies in Asia, though slowing from bubble-esque paces of growth, are still growing at high single-digit rates…China has begun (and Brazil) stimulus programs that are likely to continue…..the actions of global central banks in broadcasting 'emergency measures' (or at least strong rumors) are likely to keep markets away from a panic reaction to Greece's election….QE3 is increasingly likely….and equities in general continue to look attractive in value terms vs other asset classes.

So there are plenty of positives to justify a meaningful position in equities at this time. But 'defense' remains a key component of the strategy, and as such, I'm not chasing today's 'rally on hope'.

As Satyajit Das mentions at the end of his article, by quoting Nietzsche: "…hope is the worst of all evils, because it prolongs man's torments."

The 'torment' of the Eurozone crisis is likely to be with us for a while…..

(Please note: This article is solely meant to be thought provoking and is not in any way meant to be personal investment advice. Each investor is obligated to opine and decide for themselves as to the appropriateness of anything said in this article to their unique financial profile, risk tolerances and portfolio goals).

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