Greece fix may not prevent Eurozone meltdown

The European debt crisis influenced the global market place this past week as the on-again, off-again Greek bailout kept traders and investors concerned. Whether or not Greece is bailed out, the stigma of the rioting and that the Greek economy is unable to sustain the debt service on existing loans is not going to be solved with another bailout. The necessity to make this bailout work -- i.e. severe austerity programs as well has having financial institutions take a 60% or more haircut on the obligations -- solves nothing. With the prospect of similar problems with Italy, the third largest economy in the Euro, and Spain among others, we could very well see a Eurozone meltdown.

The question of whether or not Germany, the most solvent of the Eurozone countries, can continue to support bailouts as they occur, was also raised recently. Great Britain is already balking at continuing to fund the IMF or ECB if it means throwing money down a well with bailouts. On the basis of the ongoing questions related to the impact of the debt crisis on global economies and markets, we must once again temper our recommendations. Now for some actual information...

Interest Rates: June Treasury bonds closed at 14021, down 6/32nds tied to positive U.S. economic data but offset by the ongoing question of the Greek bailout. The reported increase in production volume at U.S. factories was better than expected in December according to the Federal Reserve. Another positive for the economy was the NAHB housing market index of 29 for February up from 25 in January, the highest level for homebuilding since May of 2007. However, the January retail sales report released during the week was less that forecast by economists but was up 0.4% for last month after a flat December as reported by the Commerce Department.With the data basically mixed, we could see continued sideways action for treasuries. We favor the prospect of continued lower rates and higher bond prices. Hold short put positions for now.

Stock Indices: The Dow Jones Industrials closed at 12949.87, up 45.79 and for the week gained 1.16%. The expectation that a Greek bailout is being worked out due to expanded austerity measures by Greece was a positive influence on equities. The better than expected U.S. economic data was also a positive. Economic data reported by France and Germany, the two largest Eurozone economies was an improved GDP and increased the possibility of an easier to fathom Greek bailout. The S&P 500 closed at 1361.23, up 3.19 and for the week gained 1.38%. The Nasdaq closed at 2951.78, down 8.07 but for the week managed a gain of 1.65%. The Dow is closing in on the psychologically important 13,000 level. With the Iranian cutoff of oil to Great Britain and France, crude price could accelerate their price gains. We continue to suggest implementing hedging strategies in the expectation that even with a Greek bailout, there are "hidden" problems with other countries within the "zone". While equities could gain further we continue to warn that any change or geopolitical events could prompt a sharp selloff in equities. Any rally should be used as an opportunity to implement hedging strategies.

Currencies: The June U.S. dollar index closed at 7984.6, up 1.1 points on shortcovering in front of the three day holiday weekend. The June Euro closed at 13165, up 18 points on continued expectations of a resolution to the Greek debt crisis, something we do not believe will be, if it comes through, without significant repercussions. The June Swiss Franc gained 2 ticks to close at $1.0906, and the British pound gained 40 points to 15825. The June yen fell against most currencies after the Bank of Japan announced an increase of the size of its asset purchase fund. The Canadian dollar closed unchanged at 10014 while the Australian dollar lost 39 points to 10576. We continue to favor the dollar on the basis of improved economic data which would preclude further Fed easing and make the dollar more attractive for foreign investment.

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