A quick update on the situation in Greece

It seems I am writing these intra-month notes more often than hoped for.  However, I want to update you on the situation in Greece and reiterate our sentiment from last month's commentary that the current market activity, while volatile, still appears to be well within the normal range for a temporary market correction.  It is also important to note that our portfolios have little to no direct exposure to European equities and debt. 

The situation in Greece and periphery Europe has deteriorated over the past several days, and credit markets are pricing in a high likelihood of a Greek default.  With that said, we think there will be a last minute deal (as suggested yesterday by the EU Commissioner: Rehn Sees Markets Misreading EU Resolve).  If this does not happen, then Greece could default within the next several weeks.  While this will be a painful event, particularly for EUR denominated assets and EU banks, we maintain that it will not spread systemic risk as happened in 2007/08 (see Greece is Not Lehman).  If our thesis proves wrong over the next several days/weeks/months, then we have several options to ride out the storm.

(1) We can stay invested in equities, (2) we can exit or hedge (via options) our current positions and wait for calmer markets, or (3) we can go short and profit if the market enters a prolonged downturn.  As of today, despite weak performance, we have not seen outright sell signs that warrant exiting our long-term positions:

• The VIX Index, which is a measure of investor fear, has flashed the “fasten seatbelt” sign but investors are still far away from “jumping out of the plane”.
• Furthermore, by many metrics the market is oversold.  If/when any of the current issues are resolved (and all should be resolved within the next several months) markets should move higher as happened last year.

Additionally, while we do not think we will witness a widespread crisis, now is a good time to make sure your financial house is in order and double-check that your checking, saving/CD and brokerage accounts are insured against bank insolvency (i.e. provide the equivalent of FDIC/SIPC insurance).  This is particularly important for assets held at select European banks.

Finally, it is important to remember that as a long-term investor the current market volatility, while disconcerting, is just noise in the longer-term context of your portfolio’s returns.