Greece Is the Word - 02/10/10

The fiscal problems facing Greece will likely be bandaged over the next few months.
The aftershock and deleveraging from the last credit cycle, however, will have a long tail.
Another bull leg could be difficult to achieve.

 

We take the pressure and we throw away
Conventionality belongs to yesterday
There is a chance that we can make it so far
We start believing now that we can be who we are.
Grease is the word (is the word that they heard)
It's got groove, it's got meaning
Grease is the time, is the place, is the motion
Grease is the way we are feeling.

-- Grease, “Grease Is the Wordâ€

For now, Greece is the word.

The fiscal problems facing Greece will likely be bandaged over the next few months and, hopefully, will be resolved in the fullness of time through financial assistance, austerity and, ultimately, a more disciplined fiscal policy.

The aftershock and deleveraging from the last credit cycle, however, will have a long tail and will be with us for some time. The aftershock will appear in numerous corners that will not only stunt economic growth but will produce a headwind to the consensus view of a smooth, self-sustaining and durable domestic recovery.

Among the areas of aftershock:

  • a multimillion phantom inventory of homes that will disrupt the housing cycle over the next several years;

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  • less credit available as the shadow-banking industry remains adrift and the securitization market is quiescent;

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  • corporate profitability and the pattern of domestic economic will be more unpredictable and inconsistent;

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  • disappointing organic sales growth;

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  • with limited upside to stock and home prices, the aspirational consumer of the last few decades will demonstrate a renewed conservatism in spending and in savings; and

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  • a retrenchment in services and an increase in taxes at the state and local levels;

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  • confidence will remain subdued and, as a corollary, so will capital expenditures and employment growth be weak by historic standards.

These factors (among others) are valuation-deflating and provide a cap to the market's upside in 2010. This doesn't mean that market rallies (even strong rallies) can't occur. It does mean, however, that another bull leg could be difficult to achieve.

It's different this time.

Or, as Grandma Koufax would like to say, "Dougie, we are traveling up Jerome Parkway (in the Bronx) without a paddle!"