After a few years of a so-called recovery since 2008, the world is still in turmoil. The markets are still wavering.
Protests in Greece, double-dip housing in the US, Moody's possible downgrade on Italy's sovereign credit rating, and China's inflationary growth issues are all running rampant. The markets have a lost a trillion dollars in value since the S&P came off its highs in April and we're seeing the index less than a few points away from correction territory.
In Europe, the sovereign debt issues and the monetary system pressures are causing a lot of pain. Billions of Euros are being taken out of the financial system while the financial exposure banks have to the PIG countries is causing major problems.
But have no fear (yet), Greece bailout number two may be here. On Friday, Greek Prime Minister George Papandreou replaced his finance minister. The markets liked that as investors were optimistic that crucial austerity measures will now be passed to prevent a devastating near-term debt default.
After two days of political chaos that threatened to bring down the government, Germany also appeared ready to provide billions more in aid to carry the debt-ridden country through 2014. So while the market took a sharp dive towards the end of Friday's trading day, we ended up rallying back up to close relatively even.
Now before you think that I am simply regurgitating last week's notes, let me explain why all of this matters to your portfolio. Take a look at this:
The Euro's correlation with the S&P 500 shows a strong relationship to the market. If you can remember in last week's letter, I highlighted the fact that the S&P was down for the sixth straight week, yet no major technical support levels were broken.
When German Chancellor Angela Merkel dropped her government's insistence on forcing a rescheduling of Greek government bonds Friday, it ended a six-week standoff that threatened to halt any more loan payouts to Greece. S&P down for six straight weeks. Six-week standoff by the Germans. Coincidence?
The focus of the Greek discussions now shifts to Luxembourg tonight and Monday, where European finance ministers are due to hold talks. My thoughts on the market: Given that it appears the Germans are being more cooperative in helping, I see the markets moving up to start the week.
While a new aid package for Greece would hold off the threat of a Greek debt default in the short term, it wouldn't address the bigger challenge facing Europe: the likelihood that Greece won't be able to repay all of its debt, and the difficulty of cutting Greece's debt burden without sparking capital flight from other struggling countries around the Euro zone's fringes.
But the market is not looking that far ahead, so watch for a move upward if we get more news of a bailout. The only real way out of the European mess is to cut the Gordian knot through federalization, as the United States did many years ago. New America, anyone?
Despite what's going on in the emerging markets and in Europe, we have our own challenges in North America driven by labour and the housing markets which will take quite some time to work off.
Having said that, the environment in the US, with the prospects of low interest rates and slow growth over the next several years, actually creates very interesting investment opportunities in the companies that will benefit from this type of environment.
Large cap dividend paying stocks and companies with global exposure are great defensive equity plays in this market. We already know the US government is going to spend more money, with or without QE3. They have already recklessly spent billiions of dollars.
Last week was another example of stupid spending when the US' inspector general for Social Security, Patrick O'Carroll Jr., revealed to us that the Social Security Administration made $6.5 billion in overpayments to people not entitled to get them in 2009, including $4 billion under a program for the very poor. In all, about 10 percent of the payments made by the agency's Supplemental Security Income program were improper.
$6.5 billion dollars given away for nothing. Good luck getting that back. Heck, good luck getting back the trillion dollars spent on stimulus in the last few years.