I included the chart above to show just how low the short term volatility of SPY had fallen before the recent pull back. As much as much as the Greek debacle may be the proximate cause of the stock drop, the steady grind higher over the last two months had left the market ripe for a pull back. The price drop is severe enough that momentum traders will be throwing out positions while value investors will still be on the sidelines for a few hundred more S&P points.
US stocks continued lower on Friday, but the long bond and the Euro changed direction. The long bond has been on a strong two week run up that was goosed higher by yesterday's late afternoon panic, while the Euro had been weakening in response to Europe's sovereign debt woes. Both trends are stretched but seem well supported by the current fundamentals. The reversals in these markets, though mild, makes me think equities will not start next week in free fall.
The Greek saga (which began in early December 2009) dominated the headlines with European policy as of last weekend looking to keep the monetary union intact at the cost of a steadily weakening Euro. There is still a lot of skepticism whether the current bailout for Greece is enough and whether the same thing can be done for the other PIIGS but it seems to me that where there's a will there's a way. This is the train of thought that is driving the weakening Euro. It may still happen that Greece abandons the Euro (likely leading to a sharp recovery in the currency) but I think the policy response of last weekend postpones it by a year while the powers that be wait to see if the austerity package works its magic.
A Greek debt restructuring will also relieve some pressure on the Euro and provide a far better template for the other PIIGS (should their situations worsen) to follow. For all the weekly on again off again bailout announcements regarding Greece it is still not clear the authorities have done their homework and come up with a plan for the Euro and European debt markets that won't need to be reevaluated in the near future. This lack of credible long term goals is the key uncertainty spooking the markets. This thought from 2004 still reflects my view on why attempts to use the bailout package to discipline the Greek government is misguided.
A Greek debt restructuring will also relieve some pressure on the Euro and provide a far better template for the other PIIGS (should their situations worsen) to follow. For all the weekly on again off again bailout announcements regarding Greece it is still not clear the authorities have done their homework and come up with a plan for the Euro and European debt markets that won't need to be reevaluated in the near future. This lack of credible long term goals is the key uncertainty spooking the markets. This thought from 2004 still reflects my view on why attempts to use the bailout package to discipline the Greek government is misguided.
Most of the economic news out of the US has been positive, though ignored. It was capped off today by the best jobs report in years. The positive recent news is being ignored due to fears of slowing growth in the second half of the year. As the US fiscal package winds down there is no obvious candidate to replace it.
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