Europe, quite simply, is back in crisis. European markets are down 10% in two days, primarily because it looks like the Greeks are backing out of a deal. Greek Prime minister George Papandreou—or, the Tower of Jell-O, as I’m calling him—pandered to his constituency and is now calling for a referendum on his country’s latest bailout package. I guess that’s what you do in a socialist government.
This not only surprised every other leader in the Eurozone, it caught every investor around the world. And it’s basically put everything that we’ve been talking about since that $1.4-trillion bailout package was announced on hold. Naturally, our markets have reacted as well—everything opened in the red and everything more or less across the board is down more than 2-3% early in the session.
Believe me, like everyone else I was really hoping this story was ancient history by now. But once again, this political problem in Europe is driving down prices. And once again, uncertainty is hanging over the markets. All those people who were running into equities during that October rally are running right back into cash. Look at what happened to the 10-year when this news from Greece broke—it fell off the bed.
But once again, this political problem in Europe also taking valuation to some very attractive levels. I know what you’re saying: Jack, why do you get so friendly to the market during these dips? Let’s take a historical perspective.
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A normal market—not one in a condition when it’s over-exaggerated or under-exaggerated—trades roughly at 15x earnings. A normal market also, by the way, has a 10-year interest rate of 6.67%. Now here we are, in a situation where we have 2% interest rates. And we could lose 20% on the earnings forecast—take that S&P down to an $80 or $85 range—and still be trading at 14x earnings. These are very attractive levels, folks. The question is whether we can ignore the noise.
Do I think the Eurozone will break up? If you’d have asked me two days ago I’d have said no. Today? I worry about it a little. But I also know that all it would take is one thing to counteract the Tower of Jell-O’s insane decision to reverse everything.
I’ve been in this market 30 years now. I’ve never seen anything like this volatility. Ever. On the one hand, it’s heart-wrenching. But on the other, to see these things move at the speed they’re moving is absolutely phenomenal. Keep watching the headlines today and watch how the markets react, especially after Europe closes. And more importantly, be careful out there and keep your powder dry.
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Al this turmoil in Europe is coupled with that major problem with MF Global. As I discussed yesterday, we in the world of futures always use customer-segregated accounts. But if the reports are true, Jon Corzine may have comingled those funds. These are the types of things people go to jail for, and I’m following this story very closely. Another example that it’s never a question of regulations, but of the regulators who don’t understand what they’re looking at.
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Big thanks to Greg Hadley of Bull & Bear Institute and Alan Rohrbach of Rohr International, who came on the show this morning and lent some high-level insight into the European crisis, the MF situation and ways investors can protect their portfolios from the fallout. Folks, if you’ve got money in these markets, you need to listen to today’s podcast, plain and simple.
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