So There is This Greece Thing…

By David B. Armstrong, CFA | Jun 29, 2015 | Weekly Market Commentary

What a weekend. The Shanghai Composite has now sold off over twenty percent, officially placing it in a ”bear market”. Greece is set to default on International Monetary Fund (IMF) payment and the U.S. markets are set to sell off (update: as of 1:15 EDT, the S&P 500 is down about 1.4%). Greece’s failure to agree to proposed reforms for new rescue funds or a bailout extension means there is a possibility for a Greek exit from the Eurozone. What does it mean and what should you do? Read on…

First – Perspective.

72 percent of the outstanding 313 billion euros in Greek debt is held by the International Monetary Fund, the European Central Bank (ECB), and European governments. Only five billion euros are held by European banks … In other words, not much debt is held by the private sector.

So what’s up?

On Friday, a “referendum” was called by Greece’s Prime Minister Alexis Tsipras and will be voted on by the Greek people … accept the bailout package offered by Europe’s creditors, or not. The vote is planned to take place on Sunday, July 5th. The outcome of the vote will determine whether or not Greece wants to stay in the Eurozone.

So while the vote is on, the Eurozone finance ministers declined an extension of the current bailout agreement, which ends on June 30th. The Greek government has enacted “capital controls”. These controls are designed to stem the flow of dough out of the country. (You know, the typical week-long bank holiday, stock market closings and ATM withdrawal limits … no big deal, just little things like that.)

Much to the glee of the 15 to 17 Julie Chen fans out there, I understand that this summer’s season of CBS’s Big Brother just started, but this is real DRAMA!

A Lehman Moment?

Over the past 24 hours, I’ve read or heard quite a bit of commentary on, “Could this be a Lehman moment?”

I checked with Doctor Evil and he said, “Let me tell you a little story about a man named Shh! Shh! even before you start. That was a pre-emptive ‘shh!’ Now, I have a whole bag of ‘shh!’ with your name on it.”

Of course the situation in Greece is fluid and can change quickly, but regardless of which direction the vote goes, we believe that the impact of this latest crisis will be relatively short-term in nature. In the longer term, we just don’t think there will be a huge negative impact due to the following:

1. Economic improvements we are starting to see in Europe
2. Better central bank safeguards
3. The ECB signaled it would do whatever it takes to keep the euro together
4. The previously mentioned lack of private market (bank) exposure to Greek debt
5. The relatively small size of the Greek economy

We do not think Greece will lead to the end of the U.S. economic expansion or the bull market regardless of which path it takes.

The Vote

Here are the scenarios:

1. Voters snub the bailout package – This would be a “NO” victory, which would land us right where we are now … Greece would try to renew negotiations with the creditors for better terms, and would probably be rejected. In this situation, Greece would likely enter grave financial and economic agony and create prolonged uncertainty. We don’t believe this is the high probability outcome. For investors who do believe this outcome will come true, trimming back any heavy exposure to euro-area investments is something to consider.

2. The vote is so close that there is no clear cut victory – If there is no clear majority victory for either side, we kind of end up in the same situation as above … It is likely that creditors would not offer additional concessions, and that we would see prolonged Greek financial and economic agony.

3. Voters definitively accept the bailout package – Creditors have indicated that they are prepared to continue to negotiate with a Greek government that is sincere about a desire to stay within the Eurozone. The problem with this outcome is that no one can be sure what is left of the ruling party … there would probably be a need for a new government. This would be a political mess over the short term, but Greek banks would keep getting their funding. The polls show that this is the highest probability event, so my opinion is that investors who subscribe to this outcome should not change their current allocations just based on this Greece mess.

What if I Don’t Really Care?

Long-term investors who have been waiting for a chance to get some cash to work should consider the fact that as of now (3:20pm EDT), the S&P 500 is off 1.75 percent on the day.

What if I Think the Sky is Falling?

As Frankie Goes to Hollywood would say, relax. Bespoke reminded subscribers in their morning research note that eleven percent of all trading days since 1928 have declines of one percent, and there have been eleven so far in 2015. Nothing is certain and this is probably more of a market in flux and not in turmoil. Here’s Frankie below…

 

 

 

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