According to a recent bloomberg article, the average yield for 10-year debt from Greece, Ireland, Portugal, Spain and Italy reached 7.57 percent, a euro- era record. The spread of PIIGS bonds vs. German bonds is also at a record for 2010. It seems as if the bond markets aren't convinced enough regarding the latest actions taken to stem this PIIGS crisis or perhaps they are anticipating some sort of restructuring. Either way the PIIGS problems haven’t been slaughtered and that's probably going to keep a lid on the upside for the market at the very least. It could very well trigger a more significant downside move than what we've seen so far.
However, as I said earlier in the year, I believe somehow, someway this PIIGS problem will be eventually be resolved without derailing the bull market. I feel this way because in young bull markets the rising tide of economic activity lifts all boats and tends to deal with such problems which are in my opinion aftershocks of the 2008 meltdown i.e. problems that are based upon old news. In the 2003 recovery, a big concern was the huge shortfalls pensions had due to the 2000-2002 bear market. People feared companies would have to divert capital towards shoring up pension plans hampering capital investment thus the economy. The pension problem was also aftershock problem which resolved itself as the markets recovered.
As the recovery continues to gain momentum, government revenues around the globe will rise easing concerns of deficits while strengthening the ability for bailout giving countries like Germany to keep providing support. Germany by the way is already in a strong position, by far the strongest country in Europe economically. If some sort of restructuring does take place with PIIGS debt, European banks which own the debt would take a haircut. But again, the rising tide of economic momentum along with the steep yield curve could possibly allow banks to be recapitalized enough to take the blow. I say possibly because quite honestly, I don't know if the European banks would likely indeed be recapitalized enough. This is something I should research more.
Look, I'm by no means an expert about the situation in Europe. What I do know is that history suggests the issues in Europe will not be a bull market killer at this point of the cycle. It can certainly trigger a correction/consolidation like it did in the spring and summer but in the end it's all about earnings and monetary conditions. Earnings for the SPX have been strong and are not far off from hitting all time highs while monetary conditions are extremely accommodative. At the same time a large portion of public opinion is skeptical/cynical/hateful towards the market and that too suggests the bull market is far from being over. At the same time I get the sense that a quite of few of those people who have been riding the long side on the bull market aren't really true believers...they are just riding the trend with their fingers on the sell button the moment the market shows any hint of trouble and that too is a LT bulish sign Even I, with my LT bullish posture still have nagging doubts. I too hit the sell button with some of my positions when I think the market is in danger of a correction, which goes against what I preach when I say that the you will have a tough time beating buy and hold during a bull market. I can't help it. I'm a chicken sometimes. I have doubts. I want to maximize profits by market timing. I'm a Pretcher fan deep down.
Ok, the last point is a lie.
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