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Greece’s Debt Crisis

Greece’s Debt Crisis

The market struggled for direction for most of the month, drifting a bit lower on rate hike and Greece concerns.  Then at the tail end of the month the Greek crisis intensified, as Greece has now effectively defaulted while also closing its banks.  This culmination of events led stocks to drop sharply.  It is still not clear whether or not Greece will exit the euro, but the situation is extremely serious for Greece.  Although Greece is a very small portion of the global economy, there exist legitimate fears of contagion that could lead to another credit crisis as Greece is not alone in possessing more debt than it can afford.

The crisis in the euro zone is the type of trigger that often creates compelling stocks to buy.  Greece’s finances should have only a very marginal effect on the intrinsic value of outstanding multinational companies, yet most stocks declined on the news.  Nevertheless the decline off the highs thus far has not been significant enough, and the starting point was an overheated market.  With the cyclically adjusted price to earnings ratio and other historically reliable broad valuation measures at or near record levels that have in the past been associated with major market peaks, I fear that Greece may serve more as a catalyst to correct overvaluation rather than as a macro news event that creates attractive bottom-up values. 

Accordingly, my already cautious outlook is becoming increasingly defensive.  I will still never hesitate to buy quality stocks at bargain prices, but I am raising the standards for such quality.

 

~~~~Michael Berlin can be contacted at mberlin@mhbpartners.com and at (631) 629-4928 .

The information included in this article is not intended to be used as a basis for making investment decisions nor should it be constructed as a recommendation to buy or sell any specific security. Consult your investment professional for additional information and guidance.
 

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