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European debt concerns are hitting a crescendo
this morning. The euro is getting killed, the U.S. dollar is rallying.
Oil prices are getting hit. It looks like a tough day, or even week, in
the making.
We’ve discussed the issues with Greece. The
concern is that Greek’s debt problems are insurmountable, and the country
will opt for restructuring its debt.
“Restructuring” is just a nice way of saying
“default.” Basically, Greece would tell its creditors that it can’t make
full interest payments on outstanding debt (bonds), and that those
creditors must accept new bonds with different interest rates.
In such a scenario, Greek bonds would no longer be
acceptable collateral for loans, which would be a huge problem, not just
for Greece, but for Euro-zone banks.
Bonds are usually considered same as cash, when
they are held by a lending institution. That means a bond counts toward a
banks’ capital base the same as cash. The bank can lend against
bonds/cash, and maintain proper loan loss reserves.
But if Greece restructures its debt, the capital
base and loan loss reserves are suddenly turned upside down. A bank could
be healthy one day and insolvent the next.
Greece is reportedly considering asset sales to
raise 50 billion euros. More spending cuts are also on the table. The
yield on Greek 10-year bonds is now 17%, and that’s clearly an impossible
amount for Greece to pay.
Greece will almost certainly be granted more loans
from the EU and the IMF. But this is clearly a vicious cycle that will be
very tough to break. And in the meantime, banks that hold Greek debt will
be maneuvering to weather a worst case scenario of an impaired capital
base. That leads to less lending.
*****Greece’s debt issues, as well as problems in
Italy, Spain, Ireland and Portugal, have been lingering for a year and a
half. And they seem no closer to a resolution than last January, when
they emerged.
This situation will probably result in some good
buying opportunities as stocks drop. But we’re also probably not at the
buying point yet…
*****We should also pay attention to the U.S.
dollar and oil prices. The dollar is rallying, but not because the U.S.
economy is strong. It’s because the euro is so weak. And in that
situation, the stronger dollar is not helping economic growth in the U.S.
It’s hurting it.
I know, nobody likes the weak dollar policies of
the Fed and Treasury. But at the same time, we must acknowledge that the
weak dollar has been a major catalyst for both corporate profits and the
stock market.
Oil prices are a double-edged sword, too, as are
most commodity prices. It’s tempting to cheer for lower oil and commodity
prices as that eases prices in general. But lower commodity prices imply
lower demand and growth. And when we get lower demand, coupled with a
stronger dollar, it does not bode well for asset prices.
*****To get a feel for where this correction might
take stock prices, let’s check in with TradeMaster Daily Stock Alerts’
Jason Cimpl. This morning, he gave his reader the following
commentary:
The first area of support is 1301 – and that
should hold today and into tomorrow. A break down from 1301 likely
results in a sharp decline to 1250 which I believe will certainly hold. A
break below 1318 is also a break down of a mini channel. A break down
from a channel is often a strong warning sign that the trend
changed.
Additionally, that type of break down will
often result in a sharp decline. With durable goods orders (a major
economic data item) for April set for release on Wednesday and a likely
break down of the channel this morning, the bulls need to provide support
to the market quickly – or risk a quick ride to 1250.
According to Jason, 1250 on the S&P 500 may be
the bottom for the current correction. It’s always a good idea to have
some stocks lined up for purchase when the market is zeroing in on a
low.
I’d recommend taking a look at Jason’s Top 10
Trades for May. There’s no doubt you’ll find some big winners from his
Top 10 list. This special report comes with detailed charts, analysis and
price targets. And the June issue will be out in the next week or
so.