The Euro/Greece problem was punted into March. The expected Greek debt offering was postponed until this coming week because of the general strike held on Wednesday that brought much of the country to a standstill. The Euro was actually up 0.16% closing at $1.3617 on the EU’s public support for Greece marking the first positive weekly move since the first week of January. For the year, the Euro is down 4.88% against the US dollar.
I continue to focus on Greece because of the importance this situation has on the European and international markets. The problem is fairly simple. Greece’s annual budget deficit now represents over 14% of their GDP while the European Union (EU) standard calls for no more than 3%. Greece’s financial problems, like many other governments, come from unconstrained government spending and a drop in tax revenues due to the global economic slowdown. While the credit markets were quiet this week as the EU publically supported Greece, the actual details and terms of the bailout are unknown. Greece wants direct support, most likely to come from Germany and France, but the German public is unsympathetic towards a country they perceive as having little fiscal discipline. One of the sticking points in the negotiations between Greece and the EU is the EU’s insistence that the Greek government pay government workers 13 months of salary each year instead of the current 14. Yes, Greek workers are paid each year for 14 months work!
In the end it will be interesting to see if Germany and France come in with direct aid, how much the Greek government is willing to cut spending, and how the populations of all countries concerned will react. I believe that if the Greeks get a direct bailout and fail to do much to curtail their spending, then the other weak members of the EU will be unwilling to make tough decisions and the problem will spread throughout the EU. The fact that the Wall Street Journal reported this week that a number of major hedge funds have taken very bearish positions against the Euro gives some indication how top money managers see the ultimate outcome of this problem. I believe this will be a classic example of the old saying, “pay me now or pay me later.”
If you are also thinking that this sounds a lot like what is going on in the US, you are not alone. The debt of the US is fast approaching 10% of its GDP this year. What is different is that we have one currency, one Federal Reserve, and one government. This gives the US the monetary tools to deal with its growing deficit that Greece does not. However, if the US fails to cut spending and increase revenues to the Treasury, we will be in for an extended period of weak economic growth—look at Japan for an example of unconstrained spending and deficit growth. For now, however, the realities abroad have brought dollars to the US and to government bonds. The 10-year treasury yield dropped to 3.62% from 3.78% last week.
As I said earlier, the US equity markets were subdued this week with the Dow Jones Industrial Average (DJIA) falling 0.74% and the S&P 500 was down 0.42%. For the year the DJIA and the S&P 500 are both down 1% after the first two months of 2010. While the markets initially reacted negatively to the weekly jobless numbers, they recovered most of their losses that same day. The NYSE Bullish Percent (NYSEBP) was up a slight 0.56%. There is little to be taken from the numbers other than the markets have shown no real direction this year. During February, the better performing market segments included Real Estate, Consumer Discretionary and the Small and Mid Cap stocks.
The broad international index, MSCI EAFE (World), was up 0.49% for the week but still off 5.28% for the year.
The Dow Jones Corporate Bond index was up 1.23% for the week reflecting some strength in the bond markets that was also seen in the treasury markets. Bernanke stated again in testimony this week that he believes the threat of inflation is very remote due to significant slack in US production capabilities and persistent unemployment. He again reiterated that the Fed will continue its accommodative monetary policy—translation: short-term interest rates will remain low for the foreseeable future.
I continue to remain cautious especially on the international markets. The Greek situation will continue to be forefront, and may well have some kind of near-term resolution when the Greek and German leaders meet in Berlin this Friday. I do not think the Euro Zone will collapse, but they have structural problems with their currency that must be resolved. China bears watching as that country seems to be navigating the current economic problems around the world better than most. Commodities were generally up slightly for the week but have continued to show great volatility.
As always, if you have any specific questions on your portfolio or wish to talk to me, please do not hesitate to call.
Paul L. Merritt, MBA, CRPC® Principal
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The bullish percent indicator (BPI) is a market breath indicator. The indicator is calculated by taking the total number of issues in an index or industry that are generating point and figure buy signals and dividing it by the total number of stocks in that group. The basic rule for using the bullish percent index is that when the BPI is above 70%, the market is overbought, and conversely when the indicator is below 30%, the market is oversold. The most popular BPI is the NYSE Bullish Percent Index, which is the tool of choice for famed point and figure analyst, Thomas Dorsey.
All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poors. The Dow Jones Industrial Average is based on the average performance of 30 large U.S. companies monitored by Dow Jones & Company. The Dow Jones Corporate Bond Index is comprised of 96 investment grade issues that are divided into the industrial, financial, and utility/telecom sectors. They are further divided by maturity with each of the sectors represented by 2, 5, 10 and 30-year maturities. The Morgan Stanley Capital International (MSCI) Europe, Australia and Far East (EAFE) Index is a broad-based index composed of non U.S. stocks trade on the major exchanges around the globe.