Critical Economic and Market Commentary:
It's all Greek to Me!

By Keith Springer

What a Difference an Ocean Makes!  On our side of the sea, we've had a wave of improving economic data.

• Earnings have been just stellar - 77% of companies have beat estimated profits for the quarter and are on track to grow 56% compared to the same period in 2009.

• Inflation is nil - the Fed can and will keep rates low.

• Liquidity - there is tons of money on the sidelines in cash and money markets, as well as in bond funds, waiting to come back to bonds when it's safe.

• Individual investors remain skeptical - sentiment remains strongly negative (which is a positive for stocks).

Two critical issues must be resolved to turn the current rally into a new multi-year bull market.

1. Unemployment must decline; and

2. Consumer spending must come back strong.

Last week's better-than-expected unemployment data was a breath of fresh air, especially because the gains in employment were so widespread. The missing ingredient is consumer spending. Personally I am extremely skeptical, given the nation's changing demographics to an aging population that spends less and saves more. However, we must keep an open mind. My heart says "no way" but my head says "maybe...but prove it!"

Across the pond, it's pandemonium. The Greek mess is spilling over and will have far-reaching consequences. To me, the Greek situation creates a different concern: the global deleveraging story of countries that massively overextended themselves during the boom years and must now pay the piper. Earning a nickel but spending a dime...that includes us, too!

So, another trillion-dollar bailout, a "Euro-TARP" fund. Where does it end? Can the solution to an over-indebted/ over-leveraged economy be more debt? At the moment, the markets are still in total denial about the total amount of debt in the developed economies and the ability of governments to bail out and guarantee everything. They simply can't! It's just a matter of time...but I want to keep an open mind so I prepare for both.

State and Municipal Update: Muni-bond Buyers Beware: State tax receipts are plummeting. The latest report shows a drop of -11.3% from 2009 and, adjusted for inflation, state tax receipts are flat versus 10 years ago. Unfunded liabilities such as pension and health care are going to kill them.

Just in California:

• April revenue from income tax payments was 26% below the Governator's projections - now 1.3b below estimates for the current year.

• Twelve of Sacramento County's 13 school districts don't have enough money to pay the health benefits promised future retirees and are not setting aside money to pay for them.

• Collectively, school districts have a staggering $1 billion in unfunded retiree health benefits.

• Officials are ignoring the escalating debt and are on course to bankrupt their districts or default retirees on benefits.

Stock Market Update: There's Danger in the Hills: The terrifying drop of last Thursday is a not-so-simple warning of how fast the market can and will fall once the trend changes. The suggestion that it was a trade error is a bunch of Bologna Sandwiches! It was simply the market makers getting out so they don't get caught like they did in 2008. Be forewarned and prepared.

For now, the economic data is justifying the rally, and it should continue. As mentioned above, if the numbers continue to improve, we are in for a new bull market. However, the increased volatility is a concern, which implies cracks in the system are emerging. Given that such warnings often precede a top by as little as two months, we could be looking at a July peak. My personal feeling is that the powers that be will "try" to stretch it out until after the election.

To participate in the upside but protect yourself in the down, be sure to invest "tactically" - don't get greedy and make sure you have an exit strategy.

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