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The Argument For Conservative Investing Grows

Stronger

Oct. 3, 2011 4:28 AM ETby: Phillip L. Clark

Staying focused on a particular investment strategy can prove difficult for amateur investors. In the currentenvironment, it is proving difficult for the most experienced managers and is likely no place for a novice, theexception being someone with a twenty year horizon who subscribes to the buy and hold maxim. If you fit thatdescription, good luck. Between Greece, a global economic slowdown, political wrangling in Washington and afailed effort in the recent Operation Twist, even the neophyte investor should be able to understand why themarkets have been so volatile. Regardless of domestic challenges, the question on everyones mind is whetherpolicymakers in Europe can contain the sovereign debt crisis. In my opinion, the longer they wait, the more likelytheir situation will deteriorate.

Its hard to say which is more important in this market. Some are focused on technical analysis while othersremain attached to fundamentals. Personally, I am relying more on the former. The S&P 500 remains tightlylocked in the 1120 to 1220 range with many indicators suggesting an oversold market. Nevertheless, investorsentiment is indicating a more bearish tone as they are focused on economic data and Europe neither haveproduced any news that might spark a rally. In my opinion, there are three primary drivers that could take stocksmarkedly higher or dreadfully lower contagion from Greece, our own (U.S.) set of woes, and whether the globaleconomy can maintain its late stage cycle of slower growth.

The latest chapter in the European saga started several weeks ago when the EU finance ministers grew impatientwith Greeces continuing inability to meet cost-cutting targets. Following their discovery of a potential 2 billioneuro shortfall relative to the target, finance ministers began discussing the possibility of withholding the nexttranche, due in September. The fact that Greece has been living from tranche to tranche could be signaling an

imminent end to their fiscal uncertainty. This kicking the can down the road can only go so far that road isrunning out of pavement.

Unfortunately, Greece and other peripheral countries dont have the benefit of devaluing their currency (like theU.S.) since they are part of Europes Economic and Monetary Union (EMU). If devaluing were an option, thesecountries could likely increase exports and consequently, create growth. In its current state, interest rateincreases on the higher-debt countries (Greece, Portugal, Spain, and Italy) will continue to test theirsustainability. For these peripheral European countries, growth will require fiscal austerity so far, this has been arejected solution. Because so many European banks have large exposure to the sovereign debt, a fiscal andgrowth solution is needed to restore confidence. The longer policymakers delay, global liquidity is at risk due tomultinational companies remaining reluctant to spend or hire given the equivocal outlook.

Making matters worse, Greece remains obstinate and has no intention of embracing much needed austerity. Toour knowledge, their hugely overstaffed public sector has yet to see any layoffs and their costs continue to rise.European credit default swaps are pricing in the likelihood of a debt default at 98% or above. Rather than riskadditional nonessential nations being dragged down, why not let the default happen now? If Greece wishes torestore competitiveness, it should leave the Euro and restructure. For these reasons, I encourage highly liquidequities and debt instruments which trade on domestic exchanges.