Europe Plummets, the Dow Follows

As of 9:45 a.m. EDT, the FTSE 100 (INDEX: ^FTSE  ) is down 1.72%, with only five of its components struggling to hold on to a sliver of a gain. The situation in the FTSE is closely followed by all other European indexes; most markets are off well over 1%.

The situation is a little better in America, where the Dow Jones (INDEX: ^DJI  ) is down 0.67%. The fabled first-quarter run the index had is rapidly going away, as the Dow is now up just 3.47% year to date. The FTSE is now firmly in the negative, down 1% year to date.

Greece at a crossroads
The center of the drama in the markets today is -- once again -- Greece. Central banks have begun preparing for the worst-case scenario -- namely, the country taking the window when markets are closed worldwide this weekend to pull out of the euro, default on its debt, and form a new currency. Now, Greece won't necessarily be leaving this weekend, but with future bailout payments on hold until Greece accepts the austerity conditions of those bailouts, the bottom line is that it'll run out of cash by early July unless action is taken to either accept austerity conditions or leave the eurozone. Complicating matters is an upcoming election in which the anti-bailout upstart party Syriza is set to increase its power.

In isolation, Greece leaving shouldn't be roiling world markets. It's just not a big enough piece of the world economy. However, when you consider that the country is a mess in all public matters -- just look at its ability to collect taxes -- the idea of it being able to execute a maneuver like creating a new currency in a very short window of time and preventing a fiscal crisis seems laughable at best.

With Greece gone, the other weak countries of Europe would come into the spotlight, specifically Portugal, Ireland, Italy, and Spain.

The bottom line is that if Greece leaves, there's going to be a period of renewed panic. To some extent that's fair, but perhaps more important is how the stand-off leads the stronger eurozone countries to negotiate with Spain and the other economically weak countries. That is to say, the impact of Greece's leaving would be very forward-looking. We need to know how it will affect the actions taken by larger eurozone economies like Italy and Spain. In an ideal world, a higher level of compromise would be reached between eurozone countries and Italy and Spain in which a more balanced budget wasn't too hard a pill to swallow, and the countries could be restructured and make long-term progress. Of course, that scenario is easier said than done. Is Spain willing to handle 10 years of anemic growth to dig its way out of this? The next few weeks could shed a lot of light on Europe's next decade.

Looking back to the Dow and American stocks, Verizon (NYSE: VZ  ) continues its strong May run by posting a 0.31% gain today. Likewise, AT&T (NYSE: T  ) is slightly positive. While Verizon and AT&T's lack of international opportunities was once criticized, with Europe struggling, other geographically diversified telecom plays like Telefonica (NYSE: TEF  ) are now under fire. The biggest Dow loser is HP, which is falling after close peer Dell issued earnings that illustrate the challenges these two very similar companies face. While HP is definitely "cheap," there's a long, tough path to it turning itself around.

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Eric Bleeker owns shares of no companies mentioned above. Motley Fool newsletter services have recommended buying shares of Dell. The Motley Fool has a disclosure policy.
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  • Report this Comment On May 24, 2012, at 10:58 PM, MHedgeFundTrader wrote:

    The Euro went through the old 2012 low at $1.260 like a hot knife through butter. On the breach, a lot of momentum programs automatically kicked in and doubled up their short positions. That is what has taken us all the way down to the high $124 handle in the cash. Let’s see how the market digests this breakdown. The commitment of traders report out on Friday should be exciting, as we already have all-time highs in short positions in the beleaguered European currency.

    The problem is that any good news whispers or accidental tweets on the sovereign debt crisis could trigger ferocious short covering and gap openings which the continental traders will get a head start on. So again, this is not the low risk trade that it was months ago.

    Still, the 2010 lows at $1.18 are now on the menu. I would sell all the “good news” rallies from here two cents higher. Aggressive traders might consider selling penny rallies, like the one we got today. Notice that the Euro is rallying into the US close every day. This is caused by American traders covering shorts, not wishing to run them into any overnight surprises.

    The Mad Hedge Fund Trader

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