Greek Debt Cresecendo?
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. It's free too, and when you get your copy, you'll also start getting Jason's daily analysis courtesy of TradeMaster Market Forecast. You can get Jason's Top 10 Stocks for May right here.
