Fasten your seatbelts. Extreme turbulence ahead.
For the past two years, the "Greek Tragedy" has been roiling global stock markets and now appears to be coming to its final climax with new elections to be held on June 17. Citigroup C �forecasts that Greece will depart the euro zone in January 2013, and analysts estimate that the euro zone's GDP could decline as much as 4% in the event of a "Grexit," which is comparable to the recession that ensued after the collapse of Lehman Brothers in 2008.
A mini bank run has been underway, as money has been fleeing Greece for two years with estimates of as high as 30% of deposits having been pulled from the country since 2009. In recent days, it appears that the flight of capital is accelerating and Google searches for "bank run" have been at an all-time high.
While the outcome for Greece remains uncertain, Spain is now in the hotseat of the global financial crisis. In days going forward, Greece and its travails could prove to be a sideshow for Spain, which is the fifth-largest economy in Europe and twelfth largest in the world.
The news flow around Spain has been hot and heavy in the last few days as major banks undergo severe stress and the country's stock market has declined more than 50% from its 2007 highs. Here are some recent highlights that all investors need to consider as we move into summer 2012:
Bankia SA, the recently nationalized lender, says it needs $24 billion and Spain is rapidly running out of options to recapitalize its third largest bank.
Spain's 10-year government bond continues spiking higher, now at 6.53% and perilously close to the "unsustainable" level of 7% which is the level at which Greece and Ireland needed European bailouts to survive.
A major region, Catalonia, gave notice that it might need government help with its debt load.
Spain's leader, Mariano Rajoy, insists that Spain won't need outside help but investors obviously don't agree as Spanish credit-default-swap pricing rose to record levels last week, the euro has been pounded down to $1.2482, near a two-year low, and Moody's recently downgraded 16 Spanish banks, including heavyweight Banco Santander.
So what is an investor to do during such uncertain and treacherous times?
One option is to head for the safety of cash or bonds, as many retail investors have recently done; equity mutual fund outflows have continued so far every week in May with significant positive flows into bond mutual funds.
Another option is to "ride it out," which gets increasingly difficult to sustain as the environment gets more turbulent and uncertain.
A third option is to seek profits from the current situation. However, this option requires discipline and a well-thought-out set of tactics and strategies to be successful. Danger and opportunity always arrive hand in hand, and today's climate offers potentially big dangers and big opportunities.
At Wall Street Sector Selector, we seek profit opportunities in both rising and falling markets and went to the "short" side of the market on May 7, taking positions in inverse ETFs along with ETFs designed to appreciate in value as markets decline. Two of our current holdings are Active Bear ETF HDGE and iShares 20+ Year Treasury Bond Fund TLT .�Other options investors could consider include a prime "flight to safety" trade in the U.S. Dollar UUP �which could see further gains should the situation in Europe continue to deteriorate.
The European debt crisis has been buffeting world financial markets for two years and today appears to be growing in intensity and danger as Greece comes to its final act and Spain reaches the boiling point. No one knows if Europe's leaders have the political will or fiscal firepower to avert disaster, but investors need to fasten their seat belts and prepare for the extreme turbulence that lies ahead.
John Nyaradi is the publisher of Wall Street Sector Selector ( www.wallstreetsectorselector.com), which actively trades a wide range of exchange traded funds. Positions can change at any time.
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