Back to Reality After Greek Elections

06/18/2012 4:05 pm EST


Jim Jubak

Founder and Editor,

The political news was outshining a whole mess of negative economic points, which have now retaken center stage, writes MoneyShow’s Jim Jubak, also of Jubak’s Picks.

That didn’t last long. The relief rally, following Sunday’s election results showing that Greece isn’t about to leave the euro tomorrow, pretty much petered out by 11 a.m. in New York.

The S&P 500, which had climbed above Friday’s close by 10:52 a.m., had given back all its gains to move back under the Friday close by 11:04 a.m. As of 3:30 p.m. New York time, the S&P 500 was up a whole 0.83 points.

Why was the optimism so short-lived? Because the reaction to the news that Greece won’t be headed out of the euro immediately has been tempered by a realization that the election results don’t do anything to reverse the slide in the Greek economy.

The shrinking size of the Greek economy means less tax revenue collected by the government and more resentment at the pain of the bailout deal from Greeks who don’t see any hope that the austerity strategy will clear the wreckage that is the Greek economy anytime soon. A shrinking Greek economy makes it extremely unlikely that Greece will be able to meet the deadlines in its bailout package.

German Chancellor Angela Merkel’s reaction to the Greek election has been, at least as far as the headlines are concerned, that Greece should not get anything in the way of lower interest rates or a extended deadline for meeting its budget targets. In other words, just another German nein and nothing in the way of actual proposals that might create bit more growth in Greece and the rest of the Eurozone.

And the yield on Spanish ten-year government bonds has increased to 7.2%—way, way into the danger zone and a record high for the euro era. Spain faces two bond auctions this week for short-term debt on Tuesday and for five-year debt on Thursday. There’s a legitimate fear that the auctions will see yields spike even higher after these auctions—and even a worry that the auctions might fail to sell the targeted amount of bonds.

Then there’s news that for yet another week, the European Central Bank did not buy any Spanish or Italian debt in the financial markets last week. Despite Spanish yields above 7% and Italian yields above 6%, the European Central Bank remains on the sidelines. The fear here is that this isn’t an attempt to put pressure on Eurozone political leaders to act, but a reflection of policy paralysis at the bank.

Furthermore, today’s meeting of the leaders of the world’s 20 biggest economies—the G20—in Mexico is not intended to produce any concrete proposals to address the euro crisis. That will have to wait for the European summit on June 28 and 29. (That summit will be preceded on June 22 by a meeting of the leaders of Germany, France, Spain, and Italy.)

Today, June 28 seems very far away.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Polypore International as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio here.

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