Three Market Bogeymen

Once again, there is considerable confusion over what will happen in Greece. We had a discussion on-air about whether U.S. investors should care about what happens with Greece. They should. Here's why:

1)a Lehman-type contagion is not out of the question. If there is an uncontrolled default, the euro will plunge, the dollar will rally ... many European banks will be hit badly.

Greece falling will bring down capital ratios for banks because current marks on bonds are held at par (thus the reason they don want a haircut), banks dive, money leaves Europe ... Europe slows and slows global growth and then contagion moves to Portugal ... less money to bail them out and the same thing happens to German banks.

U.S. bank exposure has been described as "manageable" but that may not be the case if credit default swaps (CDS) get triggered.

There is a strong chance of a total seizure of credit again, which will blow back to the U.S.

2) There is a very real chance that Greece will default. I hope you have been listening to Michelle Caruso-Cabrera's reports from the street in Athens. It's pretty simple: many Greeks do not view this deal as a "bailout" of Greece ... they view it as a bailout of Greek debt holders and an economic death sentence for Greece.

But don't kid yourself: there's more going on than Greece. In the last three weeks, stocks have been coming down because of:

1) concerns on much slower growth , and 2) the end of QE2.

1) Slower growth: the concern among stock investors is stagflation. It means lower P/E ratios. We have a long and ugly history in the 1970s of this happening ... inflation with low growth. During that time, Charles Biderman at TrimTabs tells me, there was under 3 percent wage and salary growth net of inflation ... the average P/E ratio was below 10 at that time. From 1983 to 2008 wage growth has been over 5 percent, weaker since then.

2) QE2 is taking a back burner in the media, but it is front and center here at the NYSE: in two weeks the Fed will stop pumping roughly $25 billion a week into the financial markets...what will happen? What does that mean when we are still in a slow-growth economy? We don't know.

Where is buying power coming from to buy assets if QE2 is being withdrawn?

Looked at this way, it is no surprise that the market peaked early in May, seven weeks before end of QE2 and well before the latest round of Greek worries ... money went from stocks into bonds.

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