If there is any doubt that buyers are out there, last week's 5-day rally should provide plenty of proof. Assuming that we are not poised for another of recession, stock valuations are attractive.
On the other hand, if there was any doubt that Europe's debt problems are a millstone around the stock market's neck, today's action should clear that up.
I've discussed the chain of events of Greek default that leads to contagion. European banks own $123 billion or so in Greek debt. U.S. Money Market funds own European bank debt. If (when) Greece defaults on its debt, European banks take a hit to their capital base and the stocks fall. That in turn, will make the cost of insuring that debt rise.
So, U.S. Money Market funds aren't buying as much Euro-bank debt anymore. They've cut lending. And that will mean that Euro-bank bond yields will rise, prices will fall and the insurance (credit default swaps) will rise.
Banks need a steady flow of capital to do business. The cost of capital has a major influence on profitability. Costs for Euro-banks are rising, which means profits are falling.
Combine falling profits with the potential for a smaller capital base and you start to have problems.
At the end of the day, this is a confidence issue. Though on a smaller scale, it's still similar to what occurred during the financial crisis. Banks and other financial institutions didn't know what was on other banks' balance sheets.
Rather than lend to a company that had Lehman Bros.-like exposure to bad mortgage debt - the kind that could sink a company in a matter of days - banks just stopped lending to each other.
Harbinger of doom for the U.S. economy and stock market?
This shocking FREE video reveals the appalling facts that Washington and Wall Street DO NOT want you to know... PLUS how to protect yourself and profit.
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