What Will it Take?

Stocks didn’t continue Thursday’ sell-off on Friday. Even Bank of America (NYSE:BAC) and Citi (NYSE:C) managed to put in 4% up days. BofA is not investment-worthy until there is more clarity about its mortgage exposure. But Citi is attractive. Still, there’s no reason to take new long-term positions until Greece defaults.

I will remind Daily Profit readers to be nimble in these times.

And while Greece seems to be doing as much as it can — most recently, it cut salaries for public workers — it’s hard not to miss the tone of Germany’s leader, Angela Merkel, who, over the weekend, said Europe must be able to put a "firewall" around Greece to prevent a cascade of market attacks.

According to Bloomberg, she also said, "I don’t rule out at all that at some point we will have the question whether one can do an insolvency of states just like with banks."

That sure sounds like she expects Greek default.

Germany is a democracy. And its Constitutional Court recently ruled that any new aid to Greece, or anyone else, must be approved by voters. It seems increasingly unlikely to me that voters will accept more aid.

The burden on Merkel to explain why more aid is needed is an uphill battle. Without Germany, bailout efforts for Greece will fail.

Futures are up big this morning. It appears that investors are betting that the EU bailout fund, the EFSF, will be expanded so that it’s large enough to save Greece, and maybe have an impact on other EU countries.

This seems like a risky move to me. The EU has been trying to come up with a viable plan for 18 months. I’m not prepared to wager that they’ll get it right this time.

As I noted Friday, gold prices have been getting killed. As of today, gold is putting its worst 3-day stretch in 28 years.

Gold prices were down as much as 7% in overnight trading.

As I said Friday, investors have been moving to cash. And that, coupled with record high volatility readings for gold, helped drive the price lower.

The tone, the emotional aspect of the stock market has been decidedly negative since Congress pushed the U.S. to the brink of default. The fatalistic outlook is palpable. You can almost sense that investors are throwing up their hands and giving up.

That’s driven valuations on the S&P 500 down to 10x forward earnings estimates. That’s cheap, and this may be an early stage of capitulation. But of course, it’s very difficult to depend on earnings estimates with Greek default, and the overall economic weakness we’ve seen lately.

But it’s worth considering what could change the deteriorating confidence.

Clearly, third quarter earnings will shed some light. And if they are decent, that could set the market up for a big sigh of relief.

And there’s the EU, too. If they can get to a consensus on Greece — or even agree that Greece must default and then shore up their banks — that might provide the clarity to entice investors.

And then there’s the U.S. economy. Perhaps Congress will be motivated to get a much-needed jobs package passed. That would certainly help. Also, be on the lookout for interest rate cuts from central banks around the world. This could also help turn the tide to more bullish sentiment.