As Europeans prepare to decamp to the beaches for their August holidays, the newsflow on the festering Greek Sovereign Crisis has taken a temporary, slightly positive spin. However, just like a band aid applied on the beach before one goes swimming in the ocean, don’t expect the latest “fix” to last for very long. Greece is in an untenable position and it will remain so until one of two things happen soon: either they are allowed to write off a significant portion of their debt and remain in the Euro or they are allowed to leave the Euro and write off a significant portion of their debt. The first solution will require the EU to backstop the Greek, German and French banks that hold the bulk of the Greek Government Debt. The latter will also require a backstop of banks (French and German) but will leave the Greeks with a newly devalued drachma with which to rebuild their shattered economy. Given the risk of contagion, the French and Germans would like to keep Greece in the Euro simply to reduce the damage of a cascade of sovereign debt crises that wait in the wings.

On the US side, the faux debt crisis is coming to a head as political strategists on both sides try to divine whom the voters will blame more next November for a government shutdown. The last time, Newt Gingrich ended up with the most egg on his face but that was during a relatively buoyant economic backdrop. Although the New York Times and other feel that there is a natural “out” in the form of the 14th Amendment (click here for a quick read), this political “chicken race” will come right down to the deadline of August 2nd. As those of us old enough to remember the aftermath of the Clinton/Gingrich Government Shutdown of late 1995, the long term impact will probably be negligible even if the government has to furlough workers in the first week or two of August.

While the debt crisis continues to unfurl across the developed markets, listed companies are quietly racking up decent profits as the benefits of globalization accrue to those companies who were able to take advantage of emerging market demand. A quick glance at the P/E ratios across the globe shows most markets trading in the low to mid teens. Although “low to mid teens” is hardly a screaming bargain, it is a respectable level to support an autumn rally if the Europeans can keep from scaring investors too badly. Adherents of the Fed Model might get a bit more excited but since the interest rates are being artificially held down, the validity of the Fed Model at this stage is at best qualified. Should the 10 year treasury trade at the S&P 500’s current 7.45% earnings yield (from current 3%) to bring the two into line or should the S&P 500 more than double to make up the difference? The answer is somewhere in between but it does suggest that valuations of US Treasuries vs. US Blue Chip stocks are a bit out of line. A return to the mean is not out of the question and should prove profitable for those willing and able to move with the markets.

What should investors do now?

For now, the Fund King System is signaling a risk-off, wait on the sidelines approach. Biotech (XBI) and Pharmaceuticals (XPH) are still at the top of the Global ETF portfolio with Eurocrat suspicious Gold (GLD) rounding out the top three. But none of the readings are particularly strong at the moment, signalling a lack of conviction amongst institutional investors.


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