Greek debt crisis ripples through markets

February 12, 2012 06:00 PM

If you drop a stone in a still pool of water, the ripple will carry far beyond the actual drop area. That is what is occurring with the Greek debt crisis. The ripple effect is reverberating not only in Europe but globally. For the United States, where part of the blame for the global debt concerns emanated with the repeal of Glass/Steagle where banks were allowed to compete with brokerage firms and where the consolidation of good and bad mortgages were securitized and sold globally. There is no question that the bad paper, which was impossible to evaluate for purposes of financial statements and where even the good, serviced mortgages started to default continues to cause havoc in financial circles.

The growing unemployment condition compounded the problem when those supposedly good mortgages defaulted due to mortgage holders losing jobs. That in conjunction with the false and misleading evaluations by some brokerage firms (which have been under investigations and where some participants have already been indicted) caused a veritable collapse of some banks and financial firms.

The current global situation could easily deteriorate further causing financial markets and investors to lose money and that could exacerbate the current global "recession" that we see.

The improvement in the first time unemployment figure reported on Thursday is, as I had warned in prior commentaries, the result of companies unable to lay off more workers without closing their doors. The reported increase in productivity is clearly a result of workers having to pick up the slack and do the jobs of one or more laid off workers. The reduction in the work force is assisting companies in reporting better earnings.The true nature of the unemployment figure may be affected by workers dropping out of the labor force, making the unemployment rate look slower. That anomaly could indicate a true unemployment rate of 9.5% rather than the reported 8.3%.

Another serious concern is the expansion of companies going overseas to reap the benefit of lower taxes. My suggestion in prior commentaries is that the U.S. has to compete with the lower tax bases offered U.S. corporations and entice them through lower tax rates to return to the U.S. and thereby return those lost jobs. The continued talk of creating jobs is a fallacy. You cannot create a job without creating a new industry. The U.S. needs to restore jobs not offer rhetorical statements meant to appease the public psyche. Global unrest is accelerating and could cause governmental problems with some countries. We will try, given the complexity of overall geopolitical and financial concerns, to offer our readers and clients some semblance of the ability to make viable trading decisions. Now for some actual information...

Interest Rates: June treasury bonds closed at 141 and 11/32nds, up 1 and 8/32nds tied, as are most markets, to the ongoing Greek debt crisis. European leaders indicated there would be no bailout without additional austerity programs put in place. The public in Greece are protesting against the various requirements such as pension reduction, salary cuts etc. We are not convinced of the ability of Greece to meet the requirements but Greece is not the only problem. Other countries of the Eurozone are also experiencing financial difficulties and once again we suggest that the Euro was a bad idea from the beginning. The idea of incorporating 17 countries each with its own economy and GDP into one currency made no sense to us. We wonder when Germany and France will decide that their participation in the bailouts will exceed their own abilities. We could see further "flight" to the relative safety of U.S. treasury bonds but any talk of resolution of the Greek debt crisis will prompt selling of treasuries and money moving back to higher risk equities. We view treasuries as a trading affair.

Stock Indices: The Dow Jones industrials closed at 12,801.23, down 89.23 points losing .69% on Friday and 0.5% for the week. The S&P 500 closed at 1342.64, down 9.31 or 0.69% Friday and for the week lost 0.2%. The Nasdaq closed at 2,903.88, down 9.31 points for a 0.7% Friday and for the week lost 0.1%. Fridays loss was tied directly to the euro zone finance ministers failure to approve an additional bailout for Greece and their dissatisfaction with the planned austerity programs. The people of Greece protested the cuts to salaries, jobs and pensions and raised doubts as to whether or not Greece could implement the austerity program to comply with euro ministers demands. A drop in the Reuters/University of Michigans consumer confidence index to 72.5 in February from the final January reading of 75 also a factor in the equity market decline. We once again, as we have stated "ad nauseum" in past commentaries, recommend strategic hedging programs for holders of large equity positions.

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