THURSDAY MAY 6, 2010

Greece Fire!

The stock market tumbled over 1000 points this afternoon and then rallied back to end the day down "only"  350 points.  Over 2 billion shares traded!  The underlying reason for the drop is Greece.  While Greece economy is a rather insignificant 2.5% of the European economy, its impact on the markets today was gigantic.  It certainly didn't help that there were massive protests in Greece as its Parliament approved an austerity budget.  It also didn't help that Jean Claude Trichet, the European Central Bank President, did a poor job of reassuring the markets.  It also didn't help that a trading error may have fueled the fire.

However, I believe the main issue here is the willingness of investors to lend.  It is interesting that Greek debt did not improve after Mr. Trichet said that Greece would not default and an austerity budget was passed.  It is possible that investors are providing a reality check on sovereign governments.  Hopefully our politician are watching.  If investor are unwilling to lend to Greece after the Trichet statement than they will probably be unwilling to lend to Spain or Portugal or Italy or New York State.  If that's the case, then their sovereign debt is in trouble.  And who owns the bulk of this sovereign debt?  Major European and US banks.  If the markets don't settle down, will the banks once again become suspicious of each other and cut off lending to each other like they did in the aftermath of Lehman?  In short, the cost of capital is rising and that can be problematic for the "risk trade."  And stocks are part of the risk trade.

Today was the worst intraday sell-off since 1987.  Can stocks continue their slide?  Certainly.  This correction clocks in at about 7.5%, not far from the typical 10% correction.  However, with very strong earnings and still low interest rates, I think stocks are reasonable valued.  This is likely a nice buying opportunity. 

POSTED AT 1899-12-30 15:24:00.0

KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES

Ken is a Senior Vice President and the Director of the Trust and Investment Services at Alliance Bank, N.A. He has 23 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.

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