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Why Greece Does And Doesn't Matter

Daily State of the Markets
Thursday, May 17, 2012

Good morning. Stocks have been down ten of the last eleven sessions. According to Bespoke, the NYSE Advance/Decline line is now at one of the most oversold levels seen since 1990. The talking heads on T.V. told us yesterday that the NASDAQ is now officially in "correction" territory. The S&P has fallen 6.6% since April 2nd. And the global equity markets have reportedly lost $3 trillion in value since the beginning of May. All thanks to Greece - a country whose GDP is barely larger than that of Houston, Texas.

If you are anything like me, I'm fairly confident that you are tired of hearing about almost anything related to Greece, Greek debt, Greek politics, Greek unions, and/or the country's intentions of either leaving or not leaving the Eurozone. And unless you invest for a living or are planning a trip to the Greek Islands, you may not care much about Greece. But unfortunately, the markets, once again - and for the third summer in a row - do care about Greece.

In fact, Greece is just about the only thing that the markets care about right now. For example, yesterday's better than expected data on Industrial Production was ignored, as was the report on housing starts and building permit (also BTE). So, this morning I thought we should review why Greece does matter now and will likely be utterly irrelevant going forward.

The bottom line here is relatively simple. While the political situation in Greece matters little to the rest of the world, the status of the country's banks do. And when word hit yesterday that the citizens of Greece have been pulling cash out of banks at a rate of more than €600 million a day, traders started to worry about what would happen in the event of a run on the banks.

In short, Greeks are pulling their Euros out of the banks because if Greece winds up leaving the Eurozone, their Euros will suddenly be converted to Drachmas. And after that happens, the value of those Drachmas is likely to go into a free fall. Thus, if you know anything about currency conversions, you run down to your bank, pull out your Euros and wait for the Drachma to plunge - and THEN you convert.

But as a colleague asked me repeatedly yesterday, why do we care? The answer again is pretty simple: Fear of contagion. Cutting to the chase, if Europeans suddenly decide to start pulling money out of banks in places like Spain, Italy, and Portugal, the already fragile banking system will get worse - a lot worse. And remember folks, this crisis is and always has been about the state of the global banking system.

So, while the question of whether or not Greece stays in the Eurozone ultimately will matter little to the rest of the world, this Greek tragedy is indeed affecting the daily values of the likes of Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), Chipotle (NYSE:CMG), VF Corp (NYSE:VFC), and McDonald's (NYSE:MCD). You see with the next election in Greece now set for June 17, this means that traders have nearly a month to worry about what will happen next.

And because of the uncertainty and the fear, we are seeing a buyer's strike in the U.S. stock market. While there doesn't appear to be a dramatic amount of selling pressure such as we saw in the summers of 2010 and 2011, the key right now is there is no reason for buyers to step in at this point in time - unless prices become enticing, of course.

And with the market back in a news/rumor-driven mode, it is probably time to once again to play the game more cautiously for a while.

Turning to this morning... Stocks are once again following the European markets, which are lower at the present time.

On the Economic front... Initial Claims for Unemployment Insurance for the week ending 5/12 were reported at 370K, which was above the consensus estimate for 365K but in line with last week's revised total of 370k (up from 367k). Continuing Claims for the week ending 5/5 came in at 3.265M vs. consensus of 3.255M.

In addition, we'll get LEI and Philly Fed later this morning.

Thought for the day... Do you believe in you?

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

  • Major Foreign Markets:
    • Australia: -0.15%
    • Shanghai: +1.39%
    • Hong Kong: -0.31%
    • Japan: +0.86%
    • France: -1.30%
    • Germany: -1.16%
    • Italy: -2.53%
    • Spain: -2.02%
    • London: -1.59%
  • Crude Oil Futures: +$0.57 to $94.38
  • Gold: +$15.50 to $1552.10
  • Dollar: higher against the yen, Euro and pound
  • 10-Year Bond Yield: Currently trading at 1.767%
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: -0.85
    • Dow Jones Industrial Average: -8
    • NASDAQ Composite: -4.36

Positions in stocks mentioned: AAPL, CMG

For more of Mr. Moenning's thoughts and research, visit StateoftheMarkets.com


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Disclosure: I am long AAPL, CMG.