The Greek Circus Sends In the Clowns

by Richard Band | November 3, 2011 7:22 am

GreekFlagGreece_185[1]Just when you thought the Greek circus was over — it isn’t! Prime Minister George Papandreou dropped a bombshell Monday when he announced that Greece would hold a referendum to approve (or disapprove) the country’s latest bailout package. The next day, a Greek lawmaker pooh-poohed the idea that the proposed referendum would actually take place, but the damage to investor confidence was already done.

Global stocks plunged Tuesday. Meanwhile, the price of a package of long-dated U.S. Treasury bonds jumped 7% earlier this week. Things stabilized Wednesday, but it’s anybody’s guess how long that will last.

Despite that notorious downgrade by Standard & Poor’s in early August, investors still view U.S. government paper as one of the world’s safest havens. Italian paper is another story: Yields on 10-year Italian government bonds surged Tuesday to 6.3%, even higher than at the peak of the panic in August.

That’s an alarming number, because it says last week’s grand rescue plan by the EU hasn’t stopped the silent run on European sovereign debt. Italy, with an economy seven times bigger than Greece, has always posed the greater risk to Europe’s financial system, and Italy, under the feckless leadership of Silvio Berlusconi, is squandering its last chance to enact real fiscal reforms in a timely fashion.

Marketwise, where does all this leave us? The Greek setback isn’t fatal. The year-end stock rally is still under way and will probably get back on track within a few days.

Let’s not kid ourselves though. Europe’s problems are deeper and more intractable than those America faced in the wake of the housing collapse.

We’re talking about the potential bankruptcy of several nations — not the isolated troubles of individual homeowners (however numerous). If Europe implodes, the impact on global economic growth in 2012 won’t look pretty.

So we must continue to watch for signs that the equity rebound might be running out of steam.  The first major test will occur in the first half of December, approximately 40-50 trading days after the Oct. 3 bottom.

Quite a few “sucker rallies” during bear markets of the past petered out after about 40-50 days (1973, 1981, 2001, 2008, etc.). If the market’s internal health deteriorates between now and early December, you can be sure I’ll do some additional selling.

For now, I think I’ve sold enough and can actually take a few nibbles on the buy side. Oils, in particular, have fallen off sharply from last week’s highs. When the market regains its mojo, I expect the energy sector to be among the leading performers again (as it was on the way up from the October lows).

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