7/5/2014 The Argument For Conservative Investing Grows Stronger | Seeking Alpha

http://seekingalpha.com/article/297117-the-argument-for-conservative-investing-grows-stronger 1/1
TheArgumentForConservativeInvestingGrows
Stronger
Oct.3,20114:28AMET
by:PhillipL.Clark
Stayingfocusedonaparticularinvestmentstrategycanprovedifficultforamateurinvestors.Inthecurrent
environment,itisprovingdifficultforthemostexperiencedmanagersandislikelynoplaceforanovice,the
exceptionbeingsomeonewithatwentyyearhorizonwhosubscribestothebuyandholdmaxim.Ifyoufitthat
description,goodluck.BetweenGreece,aglobaleconomicslowdown,politicalwranglinginWashingtonanda
failedeffortintherecentOperationTwist,eventheneophyteinvestorshouldbeabletounderstandwhythe
marketshavebeensovolatile.Regardlessofdomesticchallenges,thequestiononeveryonesmindiswhether
policymakersinEuropecancontainthesovereigndebtcrisis.Inmyopinion,thelongertheywait,themorelikely
theirsituationwilldeteriorate.
Itshardtosaywhichismoreimportantinthismarket.Somearefocusedontechnicalanalysiswhileothers
remainattachedtofundamentals.Personally,Iamrelyingmoreontheformer.TheS&P500remainstightly
lockedinthe1120to1220rangewithmanyindicatorssuggestinganoversoldmarket.Nevertheless,investor
sentimentisindicatingamorebearishtoneastheyarefocusedoneconomicdataandEuropeneitherhave
producedanynewsthatmightsparkarally.Inmyopinion,therearethreeprimarydriversthatcouldtakestocks
markedlyhigherordreadfullylowercontagionfromGreece,ourown(U.S.)setofwoes,andwhethertheglobal
economycanmaintainitslatestagecycleofslowergrowth.
ThelatestchapterintheEuropeansagastartedseveralweeksagowhentheEUfinanceministersgrewimpatient
withGreecescontinuinginabilitytomeetcostcuttingtargets.Followingtheirdiscoveryofapotential2billion
euroshortfallrelativetothetarget,financeministersbegandiscussingthepossibilityofwithholdingthenext
tranche,dueinSeptember.ThefactthatGreecehasbeenlivingfromtranchetotranchecouldbesignalingan
imminentendtotheirfiscaluncertainty.Thiskickingthecandowntheroadcanonlygosofarthatroadis
runningoutofpavement.
Unfortunately,Greeceandotherperipheralcountriesdonthavethebenefitofdevaluingtheircurrency(likethe
U.S.)sincetheyarepartofEuropesEconomicandMonetaryUnion(EMU).Ifdevaluingwereanoption,these
countriescouldlikelyincreaseexportsandconsequently,creategrowth.Initscurrentstate,interestrate
increasesonthehigherdebtcountries(Greece,Portugal,Spain,andItaly)willcontinuetotesttheir
sustainability.FortheseperipheralEuropeancountries,growthwillrequirefiscalausteritysofar,thishasbeena
rejectedsolution.BecausesomanyEuropeanbankshavelargeexposuretothesovereigndebt,afiscaland
growthsolutionisneededtorestoreconfidence.Thelongerpolicymakersdelay,globalliquidityisatriskdueto
multinationalcompaniesremainingreluctanttospendorhiregiventheequivocaloutlook.
Makingmattersworse,Greeceremainsobstinateandhasnointentionofembracingmuchneededausterity.To
ourknowledge,theirhugelyoverstaffedpublicsectorhasyettoseeanylayoffsandtheircostscontinuetorise.
Europeancreditdefaultswapsarepricinginthelikelihoodofadebtdefaultat98%orabove.Ratherthanrisk
additionalnonessentialnationsbeingdraggeddown,whynotletthedefaulthappennow?IfGreecewishesto
restorecompetitiveness,itshouldleavetheEuroandrestructure.Forthesereasons,Iencouragehighlyliquid
equitiesanddebtinstrumentswhichtradeondomesticexchanges.