July 2015 Market Commentary

The discourse coming from Greece has gotten delusional to the point that Argentina is starting to look rational. Here’s what I’m looking at in the markets.

The discourse coming from Greece has gotten delusional to the point that Argentina is starting to look rational. Here’s what I’m looking at in the markets.

If you want some levity, check out this Greece-focused website called Pappas Post. Some of the comments on their Facebook page are…interesting to say the least, with some readers literally comparing the No vote on the austerity package to “Oxi Day”, a Greek national holiday that commemorates refusing to surrender to the Nazi invasion in World War 2. Hyperbole much? In a way though, it does give an insight as to how the country fell apart.

If Merkel was less than impressed with the vote, the bond market was even less so. When I was leaving work yesterday, Greek 5 year bonds were trading around 25% YTM according to the Bloomberg terminal.


For the most part, Greece has likely been priced in for some time. Greece has been a concern since 2010. At this point, it is likely more of a concern for Greece itself, and perhaps a few European institutions, rather than a US problem.

Who Greece will be a major concern for are emerging markets with weaker access to external capital. According to JP Morgan’s most recent Guide to the Markets, the single worst performing fixed income asset class year to date has been local-currency denominated emerging market debt. Greek concerns have already caused a flight to quality in credit, as evidenced by the recent drop in Treasury rates.

Greece should perhaps keep this in mind as to whether or not they really, really, really want to leave the European Monetary Union. Yes, perhaps re-adopting the Drachma could mean paying off debt with inflated currency, but besides the obvious inflation implications, dropping the Euro now adds the uncertainty of currency fluctuation in the minds of investors.

To those arguing that currency devaluation is some sort of cure-all to Greece’s ills, I would suggest they examine the standard of living in Zimbabwe, the undisputed master of devaluation, and report back.

A Russian rescue is unlikely, even according to Russian bankers. What money are they going to rescue Greece with? Russia took a beating in the late 2014 drop in oil. The commentary that I have read talking about some sort of “Greek-Russian” alliance sounds like talk from people who do not understand the economic reality.

What we do need to look at

My last commentary talked about concerns that I had with China. While I’d love to take credit for having prophetic powers, the suddenness and steepness of the recent drops in Chinese stocks surprised me. A slowdown in China isn’t a good sign for the global economy.

Earnings season will be approaching in a few weeks. I would pay close attention to:

  • Overseas revenues of US companies, particularly from China
  • Energy companies, and how they have reacted to the oil rally at the start of the year and more recent sell-off
  • Tech companies, particularly the richly valued social media names, on growth and monetization plans
  • Plans for companies to hire/lay off workers, since the most recent employment report showed a weak participation rate, again

How to position

I maintain my recommendation for a defensive tilt in this market. For equities, I would favor high-quality large cap US names. For fixed income, I would favor quality and highly favor “hard” currency denominated bonds. I would also suggest some level of strategic cash, as corrections could give buying opportunities for assets that become unfairly undervalued.