Beware the Greeks - This is Not Sparta!

By Keith Springer

Economic Update: The "Greek problem," ubiquitously on the front page of late, has the potential for a contagion similar to our own financial crises, but not likely to take down the system. Europe will clean up their mess like we cleaned up ours. They'll sweep it under the rug...out of sight, out of mind.

On our shores, the economic releases have been gangbusters. The Leading Economic Indicator and the Purchasing Managers Index both recently rose to a 26- year high. This comes on top of other positive reports from GDP, inflation and industrial production. In addition, earnings have been stellar as well. Heck, even GM reported a 20% increase in sales! Will wonders never cease?!

From here on out, the numbers will have to show a positive effect on the bottom line: employment and consumer spending. If employment and consumer spending don't pick up in the next few reports, a real sustainable recovery will be hard to muster.

Headwinds: The demographics of an aging population spending less and saving more will continue to decrease demand for goods and services. The debt problem continues to plague our nation, as well as the developed world. At the moment, this issue has been masked by government spending, but we all know that the cure for too much debt is NOT more debt. Both of these issues are spiraling problems that will take years to unwind.

Stock Market Update: The markets have been getting even more jittery of late, as we've seen more volatility and wild swings. Although a correction is due, the level of volatility is a concern.

The pace of the advance has also been slowing. The first 100-point rally in the S&P 500 from 700 to 800 took only 13 days; the next 100-point increase was over 41 days; the following 100-point jump took 89 days; and the most recent move from 1100 to 1200 took 151 days. This swelling volatility and increased selectivity is what often happens at market tops. It is typically not cause for great concern yet, as this can go on for months before it breaks in one direction or the other.

The market is at a reflection point. It has risen in anticipation of an improving economy, and it has been getting it with very strong economic reports. Now it wants more.

 If we begin to get improved employment figures and increased consumer spending, then a new bull market is underway. If these do not start to develop soon, pull your helmet out of the basement (again) and dust off that exit strategy.

Investor Strategy: Given the power of the improving economic reports, there is no reason to believe that this is anything more than a normal correction in the short term, but
I am keeping a close eye on it.  

The funny thing about corrections is that everyone agrees we must have them, but when they come we panic, screaming "Oh my God, the market is falling, something must be terribly wrong!" The Greek contagion is simply today's catalyst.

The market is going to get hammered at some point once again, but not immediately. At the moment, the government is creating a nice bubble, just as it did in 2002. Even though we knew a bubble was forming then, we still had a bull market for over four years. For the longer term I don't believe the demographic situation and debt problems can be overcome for years, but I am keeping an open mind.

Risk management strategies will be more critical going forward, where risk is properly "managed," but not necessarily avoided. It is critical to take what the market gives you when it gives it to you. Participating in the upside and getting the best returns with the least risk possible, while also being "tactical" and ready to adjust your portfolio to changing market conditions, is critical. Sitting with money in the bank and/or having a buy-and-hold strategy is suicide.

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