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Jim Cramer Vs Economists on Grexit: Buy on Dips or Not?
Aspire | 12 August 2015
By: Lim Si Jie
Articles (169) Profile

Not long ago, Greece became the first developed nation to default on its debt. The cash-strapped country defaulted on its 1.6 billion euro payment as per market expectations. During the next few days, Greece was forced to implement capital controls after it failed to reach a deal with creditors. Banks went on to be shut for much of the whole of last week.

With 61% of Greeks voting against the terms of an international bailout in the Greek referendum, thought leaders are split between two major camps:

  1. Buy on dips;
  2. Stay safe on the side-lines because there is too much uncertainty and volatility.

Jim Cramer: Market Too Complacent

Jim Cramer believes that there is just too much investor complacency going on in the market. As a result, he does not advocate taking any long positions despite the recent dips. While Jim Cramer is a big fan of buying stocks on a dip, he opines that the drop on major indexes is far from just a dip.

Market Ignored the Greek Situation

Greece gave investors the impression that they were really negotiating in good faith and aiming to seek a bailout deal with the EU. The overly positive investor sentiments of a possible bailout left investors turning a blind eye on the increasingly obvious fact that the Germans and the Greeks clearly stood on separate sides. Investors have since then paid the price as global indexes saw consecutive days of losses, which is expected to continue after confirmation of the results of Greek’s referendum.

US And EU Market’s Performance Correlation

The US market’s decline (on the same day as European market decline) showed that it could not withstand the impact of the European market being down 4 percent in a single trading day. The big decline shows that there will be an economic impact from Greece to the US. While Greece is a small country, the short-term economic impact for Europe cannot be underestimated. US companies, especially those with sales in Europe, will likely take a hit in topline this quarter.

Strong USD Affecting US Businesses

The Fed recently signalled that a rate hike for September was still on the table. The continued signal from the Fed of an early rate hike before the end of 2015 has been driving the USD higher. The US market has been breaking down ever since the dollar had begun to become more expensive.

While the recent euro recovery was welcomed, US cannot afford to have another major economic decline in Europe which will lead to a weaker Euro in the long run. According to Jim Cramer, the US market needs USD to undergo a correction and go lower before the US market will recover.

Puerto Rico Debt Crisis Closer Than We Think

The Puerto Rican debt crisis is much closer to us than we think it is. There are investors who have spent a fortune buying bonds in Puerto Rico. A number of hedge funds have also borrowed money to invest in Puerto Rican bonds. This means that there is plenty more pain ahead, especially margined hedge funds. This could trigger a domino effect that has unimaginable consequences on the global financial markets.

Buy On Dips

Unlike Jim Cramer, David Rosenberg believes that once the Grexit crisis passes, it will be a buying opportunity. Although investors might want to stay on the safe side while the Greek crisis continues to drag out, Rosenberg opines that it is a good time to go right back into the euro zone financials to pick out fundamentally sound European equities.

According to chief economist at Gluskin Sheff, David Rosenberg, a Greek exit (Grexit) from the euro is still a “low probability scenario”. While Rosenberg believes a deal between Greece and its creditors will be reached, delays were part of his projections as well.

QE and Cheaper Euro Fuels Bullishness

Rosenberg has been bullish on Europe over the past several months because of the European Central Bank’s quantitative easing program and a more competitive supercharged currency. On top of that, the regional economy is doing far better than it was a year ago.

PIIGS Not A Problem For EU

Rosenberg believes the ECB will get a lot more aggressive with its QE while continuing its other initiatives as a result of Grexit threats. Moreover, there have been some encouraging signs in the fixed income market, with the Portuguese, Italian and Spanish bond spreads off of Germany widening by only 30 basis points. Rosenberg claims that the contagion of the Greek crisis to the EU and global financial market has been “very limited so far”.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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