Breakout

U.S. Sell-Off Sparked by Concerns of Disorderly Greek Exit

Jeff Macke
Breakout

If U.S. markets are open, they're likely getting hammered because of something related to Greece. Yesterday's news was former Greek Prime Minister George Papandreou calling this a "make-or-break moment for Greece and Europe." Papandreou followed that banal observation by estimating the cost of a Greek exit at anywhere from €500 billion to €1 trillion ($640 trillion to $1.28 trillion).

The comment, and apparently off-hand financial estimate, immediately took about 1% out of stocks yesterday afternoon and is being cited as one of at least half a dozen causes behind Wednesday's sell-off.

Mark Luschini, of Janney Montgomery Scott, says that specifying the reason for selling is largely pointless. What's driving U.S. stocks is "Europe. Every day, all day." Until something resembling a resolution—or a fiscal triage strategy—emerges from the EU, markets will take a dim view of almost any new development.

Luschini isn't entirely pessimistic, believing as he does that European leaders are quietly "working toward the eventuality of Greece leaving the euro currency." If EU leaders are going in that direction it's not happening quietly. It may be a different story beneath the surface, but what can be seen looks a lot like a 26 on 1 fight between Germany and the rest of the European Union.

As the last pro-austerity country standing, Germany wants less spending. The goal of the stimulus camp is the creation of euro bonds. These bonds would be backed by all member nations, enabling a consolidation of common debt which the ECB could use to bail out troubled banks. Such a move would hopefully stem the tide of outflows from panicked depositors in Greece, Spain, and Italy in particular. It would be another step toward a real European Union. There's the possibility that enormous inflation would result, but that's a problem for another day.

As Luschini sees it, "Any resolution would be better than the chaos we have now." The news of a Greece exit or some other draconian outcome may be shocking to stocks initially, but it would at least allow investors to start rebuilding markets without the risk of waking up in the morning to find their positions decimated, by anything from Greek Nazis to a run on Spanish banks.

Luschini thinks investors would be best served by staying less than fully invested and focusing on companies that are only doing business in the slightly less risky American economy. He advises a mix on bonds, stocks, and at least 10% in cash, both to protect your portfolio and keep powder dry if and when we get one last piece of definitively bad news out of Europe.

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