• Investing & Markets

Market Digest – Week Ending 2/10

February 10, 2012 | Craig Birk, CFP®

Focus returned to Greece. The country has 14 billion Euros of debt coming due in March and is reliant on bailout money from the rest of Europe to pay. An agreement was expected this week but has proven difficult to finalize. European leaders are demanding increasingly strict austerity measures, which are being balked at. In the US, a confusing settlement with banks to atone for improper foreclosures pleased few, but it did reduce uncertainty surrounding the banks liability.

Weekly Returns

S&P 500: 1,343 (-0.2%)

MSCI EAFE: -1.2%

US 10-Year Treasury Yield: 1.97% (+0.05%)

Gold: $1,721 (-0.3%)

USD/EUR: $1.317 (+0.2%)

Major Events

  • Monday – The White House announced a freeze on all Iranian government and financial institutions’ assets under US jurisdiction, including those of the state owned oil company.
  • Tuesday – Bernanke told congressional lawmakers that a failure to extend the Bush-era tax cuts when they expire next year could slow economic recovery.
  • Thursday – Greek leaders tentatively agree on a new budget, as well as wage and pension cuts designed to secure Eurozone bailout money.
  • Thursday – Five of the nation’s largest banks reached a $25 billion settlement with 49 states in response to a probe into improper foreclosures. The money will be split among direct payments to foreclosed homeowners and homeowners currently underwater on mortgages, and in the form of lower interest rates to existing homeowners previously unable to refinance.
  • Friday – The Greek austerity agreement threatened to unravel as a governing coalition party pushed back against German demands for deeper budget cuts. Demonstrators in Athens protested the cuts.

Our Take

Greece is like a cough that won’t go away. But if this small nation’s debt problem is the biggest thing holding the market back, we are optimistic. A messy default would have consequences and cause much economic disruption, but many bondholders have already accepted they will be taking 70% losses on Greek debt. There isn’t much remaining downside for creditors, so the risk of contagion to larger economies is lower than it was last summer. That said, we hope and expect Greece will reach agreement with the rest of the Eurozone and begin the painful process of moving on to greater prosperity.

The US bank settlement was confusing. On one hand, it was very bearish because the state governments forced businesses to make payments in a seemingly random fashion. Those who faced wrongful foreclosure deserve compensation. Those who simply are not paying their mortgage do not. The banks deserved to be sued, but this type of arbitrary force and reallocation from the government is simply scary. On the other hand, the settlement removes uncertainty for key players in the sector, especially Bank of America. This gives investors one less thing to worry about and hopefully improves the lending environment.

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