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How Did We Get Here?

Daily State of the Markets
Tuesday, June 19, 2012

Good morning. If you are anything like me, I'm guessing that you have probably heard enough about Greece to last you a lifetime. Well, unless of course, you are discussing vacation plans, that is. But unfortunately, if you want to have any shot at comprehending what the market is doing or why it is doing it, then you've got to have a working understanding of what is happening in Europe. So, I thought we should spend a few minutes this morning hitting the highlights of how we got to where we are and what is happening at the present time.

To be sure, Greece has been at the epicenter of the European sovereign debt crisis from the beginning in the spring of 2010. If you will recall, Greece put on way too much debt when preparing for the Olympics and unfortunately they never bothered to knock down any of that debt. We don't have time to get into the culture of Greece or the extent of the corruption in its government, but we should point out that not paying taxes is a bit of a national past-time for Greeks. As Michael Lewis detailed in his book "Boomerang" (a fascinating and quick read, btw), tax collectors were often fired for... wait for it... attempting to collect taxes.

Although Greece was living well above its means and the government could be accused of spending money like drunken sailors, everything was fine until the you-know-what hit the fan in 2008. As a result of what was nearly a global banking collapse, suddenly investors looked differently at debts of all kinds. So, before you could figure out how to spell the Greek Prime Minister's name at the time, nobody wanted to lend money to Greece anymore. Rates soared and Greece had to go to the EU to ask for loans at reasonable rates in order to rollover the country's existing debt - aka a bailout.

The problem is that the loans from the "troika" (the ECB/EU/IMF) also carried stringent austerity measures which the Greeks were expected to live up to. In other words, the Eurozone told Greece to change their ways. Thus, it wasn't surprising that the unions that had gotten fat and happy with their cozy arrangements were none too happy when financial reality was enforced on them. And to say that they put up a stink is a bit of an understatement.

The public riots soon followed and then-PM George Papandreou stepped down in order to try and bring peace to his country. The idea was that Papandreou would leave and turn things over to a caretaker government, which would implement the last of the reforms demanded of them by the "troika" and then take the country to elections. Which is where things really got interesting.

After a series of threats, deadlines, and a whole bunch of political drama, Greece managed to sign on the dotted line which meant they would have enough cash for a couple of years as they worked to restructure the country's fiscal policies. And while nobody in Greece liked what was going on, it appeared to be the only way for the country to survive. Thus, Greece was considered solved as far as the market was concerned. Well, that is until the politicians started talking.

With an electorate that wasn't happy, it shouldn't have been too surprising that some young buck finally stood up and loudly pronounced, "This won't stand! Elect me and I'll negotiate a better deal with those dastardly Germans" (or something to that effect). Never mind that Alexis Tsipras didn't have a leg to stand on or that he couldn't even get a meeting with Angela Merkel, the Greeks suddenly had hope that things might get better.

Again not surprisingly, Mr. Tsipras did well in the initial election. So well in fact that he refused to play along and form a coalition government. No, he wanted another shot at winning the whole thing. So, Greece held a hotly contested redo election on Sunday between the conservatives who backed the idea of staying in the Eurozone and the radical left who wanted to play a game of chicken with the Germans.

This brings us up to where things stand now. As you well know, the conservatives (the New Democracy party) won the election and now have three days to form a government (meaning that they must put together a ruling majority in the 300-seat Parliament). If New Democracy is once again unable to form a government, then Mr. Tsipras will get the next shot at it. But as of this writing, it sounds like the conservatives have convinced at least one - and maybe two - other parties to join them in creating a "coalition government" that could create the majority needed to rule.

So, there you have it. We now enter day two of the three day period that New Democracy and Antonis Samaras have to try and put together a deal. And if they do, there is a decent chance that the markets can once again push Greece to the sidelines for a while. (Note that there is already talk of Greece needing yet another round of financing.)

The good news is that the stock market appears to be looking at the Greece glass as being at least half full at the present time. Although the fast money crowd tried pull a repeat of last week's "pop and drop" after the bailout of the Spanish banks was announced, the bulls would have nothing of it on Monday. And given that yields in Spain went to new record highs yesterday and that both the Spanish and Italian governments are nearing the point where they will need to ask for assistance, I'm going to say that stocks held up pretty darn well.

However, in keeping with our "how did we get here?" theme this morning, it is also worth noting that much of the positive face that has been put on the market over the past two weeks - this in spite of the fact that both Spain and Italy are likely to need help financing debt very soon - is being attributed to the expectations that the Bernanke's gang is about to mount their white horses again this week. And while many are not convinced more of something that hasn't really worked too terribly well is going to succeed this time around, traders do know what to do if Helicopter Ben hits CTRL+P again this Wednesday. (Yep, it's now famously called the "risk trade" which includes stocks (NYSEARCA:SPY), emerging markets (NYSEARCA:EEM), commodities (DBC, JJC, SLX, etc), shorting the dollar (NYSEARCA:UUP) and buying junk bonds (NYSEARCA:JNK). So, if you suddenly see this batch of securities flying on Wednesday, you'll know how we got there.

Turning to this morning... Oracle's strong earnings plus expectaions for Fed action are keeping a bid under the market this morning. This despite confidence indices diving in Europe, yields soaring in Spain, and reduced guidance by FedEx (NYSE:FDX).

On the Economic front... Housing Starts in May were reported at an annualized rate of 708K, which was down 4.8% from April's reading and below the consensus for 721K. Building Permits for May rose to a rate of 780K. This is up 7.9% from April's revised 723K and was above the consensus of 728K.

Thought for the day... The great question is not whether you have failed, but whether you are content with failure. -Chinese Proverb

Pre-Game Indicators

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

  • Major Foreign Markets:
    • Australia: -0.39%
    • Shanghai: -0.66%
    • Hong Kong: -0.06%
    • Japan: -0.75%
    • France: +0.36%
    • Germany: +0.43%
    • Italy: +1.25%
    • Spain: +1.60%
    • London: +0.90%
  • Crude Oil Futures: +$0.26 to $83.53
  • Gold: +$4.30 to $1621.50
  • Dollar: higher against the yen, lower vs. euro and pound
  • 10-Year Bond Yield: Currently trading at 1.588%
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: +6.32
    • Dow Jones Industrial Average: +50
    • NASDAQ Composite: +12.63

Positions in stocks mentioned: SPY

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Disclosure: I am long SPY.