Gaming Greece

While I've been suffering with computer integration issues {which BTW included a nasty virus on an older machine of mine that I didn't know I had} the world continues to turn.  Yesterday saw a sail through the wind rally that basically took stocks up about 1.5% points in the last 90 minutes of the day.  This happened as word leaked around the globe that central banks were standing ready to inject massive amounts of liquidity into the system.

Let's translate that into basic English.  "We central bankers stand ready to do what we gotta do if Greece ditches the system on Sunday." 

When I think about what's happened in the past month or so, it's likely that investors have already discounted much of the fallout if Greece actually votes to pull out on Sunday.  In that case I think we could see an initial move lower, followed by stabilization and then some sort of reflex rally.  My crystal ball doesn't get me much farther than that if this is what comes to pass.  Equally if Greece votes to stay in the Euro I think markets could rally stabilize and then give some of those gains back as everybody sits back and says "and now what?".

The scenario that is beginning to concern me and which we briefly discussed two posts below this one is that the initial results out of Greece Sunday are positive and markets rally.  Then it becomes apparent over the course of the next 3-4 weeks that irrespective of what the Greek government says or does, they just can't get there.  Markets top out in the 1370-1400 range between now and say early/mid-July and then begin one final descent as movements in Europe come finally to a fruition.  That is the scenario I'm beginning to favor more and more.  It also likely means that based on what I know today, if we get that rally into mid-summer I will become much more defensive minded in client portfolios. 

Now of course nobody knows what will happen between now and then and it is possible that some sort of "grand bargain" will come to the fore that changes much of my thinking.  However I just can't get away from a few things:

-Bailing out Greece {or for that matter Italy, Portugal & Spain} remains wildly unpopular in Germany and the other Nordic countries that would have to foot the bill.  A Greek government that basically reneges on the current austerity bill and wants to come to the back to the negotiation table may be too much for these countries to handle.

-It might be easier to make an example out of Greece and use the money that would have been poured into the country to backstop the others.

-Fundamentally many of the nations in the European Union are comprised of peoples who don't like their neighbors very much.

So we'll see what happens over the weekends. In any event next week is likely to be an interesting one!