No Major Moves For Equity ETFs, But That May Soon Change

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Although falling deeper earlier in the day, the S&P 500 only finished down 0.25%. Overall, the S&P 500 hasn’t greatly fluctuated as of late, but the VIX index spiked over 5%, indicating that more volatility might be coming. Nevertheless, European and Asian indices were down by a larger magnitude.

While currencies and commodities were relatively flat on the day, the 10-year Treasury fell to 1.84%, signifying more flight to safety. Understandably, the situation in Greece, which is the main focus at the moment, has spooked a number of us.

The friction in Greece continues as the Greeks demonstrated strong resistance to the German proposition that the Eurozone take charge of Greece’s budgetary matters. However, as Greek PM Papademos highlighted, the country will face bankruptcy if it can’t obtain additional bailout funding. The bottom line is that Greece has been inept in instituting fiscal reform, unable to meet its budget targets and failing to demonstrate that it can be financially self-sufficient in the long-run.

To get an idea of the possible scenarios in Greece, take a look at this decision tree. While there’s a possibility of a deal getting worked out, I believe Greece needs to leave the Eurozone rather than have Europe subsidize it for the next 10 plus years.

On the other side of Europe, Spain’s woes see no end in sight. Its GDP growth was -0.3% in the 4th quarter, and with over half of 16-24 year olds unemployed, the economic horizon is quite dark. Spain, and Italy for that matter, simply can’t afford to fall down the same treacherous path as Greece.

Also, Eurozone leaders were in Brussels today to hash out budget deficit guidelines. Germany wants to stick to strict rules, but getting 17 countries to agree will be a tall order.

As far the European credit system is concerned, U.S. banks are further shying away from lending to European banks according to the Fed. As the U.S. and China among others want to limit their exposure to the European contagion, Europe is going to need some other financial lifelines to make it through this crisis.

In the U.S., one would’ve thought the Christmas season would bring in greater consumer spending. But Department of Commerce data indicated otherwise with consumer spending slowing down in December while only increasing 2.2% for all of 2011. If anything, this is a sign that consumption won’t help the U.S. economy recover.

While Greece’s fate hangs in the balance, my goal remains to minimize our downside exposure. Thus, we aren’t budging from our cautious investment stance one bit.

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