The Experts

Are we learning to ignore Greece?

Europe’s negativity has been partly trumped by some US positivity and investors’ greater willingness to stay with stocks but the VIX or the fear index is rising, though it’s still a slow rise. Still, the question is, are we learning to ignore Greece?

The answer is no as Wall Street did react negatively to two Greek news flashes. The first was the news that no coalition government will happen in Athens and so new elections are in train for the Greeks. Then there are reports that Greek banks have seen a 700 million euro run and why wouldn’t this happen as it makes sense to take your money and run until you know if Greece is going to stay or split from the euro. Smart Greeks would be trying this play as any shift to the drachma could mean a big profit when you convert the euro to the local currency — if you had the guts to trust a new drachma!

On Wall Street

Back to the story and what’s interesting is the Dow only lost 63.35 points or 0.5 per cent to 12,632 while the S&P 500 index gave up 7.69 points or 0.57 per cent to 1330.66, which shows there’s not the kind of panic we saw last year whenever Greece grabbed the news headlines.

Frankly, Greece as an economy is not important and I reckon the EU finance ministers and banks have a B-plan for a Greek exit from the euro but the big risk news stories for the markets for this year will have the names Spain and Italy in them. What happens in these countries will determine whether we have a good year with stocks or not as these two countries are too big to fail.

At the moment the VIX is telling me that there’s more confidence that contagion can be contained but that is the big question mark that no one can complacently ignore. By the way, when we can get into that kind of headspace, well that’s when a sustained bull rally will begin and the bears will be forced into hibernation.

Buy the dip?

For me, as a long-term investor my greatest anxiety issue is when shall I buy this dip? Could it go lower? Or do I dive in now? Professor Ron Bewley showed me on my Switzer program that material stocks — BHP and Rio — look like good value now based on his exuberance readings but they could go lower on this bad EU news and so there could be better value in coming weeks. That’s always the issue for market timers, which I try to avoid but there’s a good chance to dollar cost average down some stocks I paid too much for before the GFC.

Against this short-term negative view, my full-year assessment is in line with US fund manager Jim Paulsen of Wells Capital Management, who places a lot of positivity on the US economic recovery and this explains why the reaction this year is more muted than last year.

Overnight in the USA inflation was flat and the Empire State manufacturing index spiked from 6.56 to 17.09 in April, which was a strong result and says a lot about the value of anti-austerity measures which the Yanks practiced to beat the GFC. There could be a lesson in this for the Europeans.

Anyway, Paulsen told CNBC that the European crisis is about two and a half years old and when sell-offs happen on Armageddon news, eventually the stock market makes new highs.

Paulsen has the S&P 500 up around 1500 for year’s end and that would be a 12.7 per cent gain and if he’s right and our interest rates track lower and our dollar resists rampant rises then our market could do even better!

The long-term investor

Of course, I could be wrong, but as I only buy good companies at good prices that I want to hold for a long time, I can wait for the time when I'm right. If that’s not you, you might have to play dividend stocks but they are getting pricey at the moment, thought they still are yielding nice returns even at these prices.

Greece could spook me in the short-term but I’m generally ignoring it, seeing it as a buying opportunity, so I guess I’m not totally ignoring the sorry story.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published: Wednesday, May 16, 2012