With the talks between the EU, IMF, and Greece rumored to end today or Friday it raises the question of what these discussions will bring. The fact that other countries are starting to face problems with their debt, the EU cannot look at the fix in the scope of Greece alone; they will now have to take into consideration that the path they choose now could be repeated and result in much more money that what Greece is asking for now. I think that any language that does not show how resolute the EU is to back Greece will cause a continued deterioration of the European markets (as well as the Euro). Also unconditional backing of Greece will create a long term concern about the effects of more countries needing assistance.
Depending on how you are invested in the market that is. The spread of the credit crisis in Greece to Portugal has brought the fears that many have publically dismissed and privately feared. I am comfortable where I am in the Vine strategy (yet still looking for another segment) and will stay in the positions I have until further light is shed on what will happen in the EU. If you took profits you are in a good position and should start looking for a place to invest them; when the environment is friendlier. If you were riding the rally into today consider your portfolio and the risks that could continue to eat away at your portfolio (illiquidity, flight to safety, policymakers, etc) and lighten your exposure or prepare for a bumpy ride. This could be the start of the testing period of the rally and the outcome will tell us if there is continued growth from here or a pullback. I would watch the Eurozone as a major catalyst of where the markets are taking their direction from.
The resiliency of the market rally is really impressive to watch, and unnerving to think about. The rally is great for the Vine strategy and investors 401ks and IRAs but for the actively managed portion of your portfolio one should start to think, how long can this rally last without even a slight test to its validity? As I discussed in an earlier posting I think that investors should use the opportunity to take profits in riskier portions of your active portfolio and perhaps even take positions in more conservative assets. With the majority of your wealth being long anyway (retirement funds and mutual funds), an early withdraw from profitable positions will not make you miss a rally completely but in the event that the market does correct you will have the ability to put some of your active Vine profits into your passive investments at lower prices when you rebalance your total portfolio. Our current Vine strategy seems to still be in a good position but I am starting to consider the next segment in the strategy. (see Vine Scenario for details).
Looking into the future market conditions, I am less optimistic about the future of the current rally. I think that any profits should be taken and positions in the financial sector should be pared back as well. The issue with Goldman Sachs being accused of fraud by the SEC will not go away as easily as it would have, say 3 years ago. This will give greater strength to the argument that there needs to be more regulation and separation of powers that is already bouncing around Washington. With healthcare out of the way and the Easter recess over this is the first big topic to come into light since then. These allegations will affect the market more than some might expect and I think it would be a good idea to pare back risk or at a minimum, refrain from increasing it. You only have to look back to February to see what regulatory reform talk can bring to the marketplace.
The 30bln Euro pledge from the European states to Greece lifted the markets (as well as the euro) in the beginning of trading. I think that the pullback that has been occurring (especially in the Euro) is a clear sign that investors are looking at the big picture and thinking about the ability or willingness to bail out other countries as they meet with the same issues. The best way to look at this news is that it will give you an opportunity to get into a short the euro trade over the next week or so. Pay close attention to the Asian currencies due to the speculation of China allowing their currency to strengthen. Basically, this will benefit any country (and company) that China buys from, perhaps increasing demand for foreign good in the country.
Keep an eye on the Yield curve this week (especially the 10yr) as there seems to be a “normalcy” trend coming back into the market where rising stocks mean rising yields (or dropping prices). I think Fixed income, and treasuries in general are going to have a lot of headwinds should no double dip occur. Improving macro numbers and the amount if issuance coming out with week by the treasury (the 10yr auction is on Wednesday) will no doubt make higher returns, not safety, a requirement for investing going forward.
The manufacturing numbers world wide is a good reason to celebrate. It helped the EWG reach a gain of 10% since we bought into it (see the vine scenario page for more information). I think that the car sales numbers will also help shorten the gap between the % gains between Ford and Toyota. Tomorrow we will see what the Job numbers have to say about the threat of inflation which could still be down the road but worth keeping an eye on.
There has been a lot of news lately about the amount of money going into bond (mostly corporate and high yield) as of late. I believe that in the medium to long term there are a lot of headwinds that face fixed income investments. If inflation starts to rise and unemployment starts to drop (at some say it is at a turning point now), the Fed will be pressured to raise rates, killing Bond attractiveness and potentially boosting the equity market as a result. If you are in fixed income now beware of these factors and start to look for equities to move your gains over time.