With crude oil surging and the dollar still weak, today King World News is featuring a piece from one of the greats in the business warning that we may now be on the verge of a global panic.

"I mentioned to you that when I returned from my meeting with Putnam Funds, I would share with you what Bill Kolhi told me in the hallway during my visit about the German Bund and why it is trading with a yield of ~ ½ percent." — Joe Monaco, Ph.D., Monaco Capital Management

By Jeffrey Saut, Chief Investment Strategist at Raymond James

June 9 (King World News) – Joe Monaco went on to scribe my friend Bill Kolhi's thoughts (as paraphrased):
1. We at Putnam own some Greek debt because we do not believe Greece is going to default and we want to pick up that extra yield.
2. We could be wrong and Greece will default.
3. If Greece does default, it will cause a panic in Europe, especially in debt instruments issued by the less secure countries (justified or not).
4. In such an environment, every institution that MUST be invested in Euro-denominated securities will run for whatever is considered the safest security in Europe.
5. It is generally believed, without question, that anything guaranteed by the German government is the safest thing in Europe from a default.
6. If this happens, the German Bund will skyrocket in price as everyone tries to "run through that door" at the same time.
7. Institutions throughout the world (including Putnam) have been therefore buying the German Bund as a hedge against a Greek default, rather than buying it solely as a debt instrument.  So it doesn't matter what the Bund yields, or even if it has a zero or negative yield.  Almost no one is buying it for income.
8. Simultaneously, Greek debt is being bought by certain institutions that have significantly large German bund positions, because if Greece does indeed somehow solve their issues, it dissolves the need to own a virtually non-interest-paying hedge.  This would cause the German Bund to plunge in price.  The Greek bond would, in such a scenario, jump in price, and that price increase, coupled with the very large interest payments, would act as a hedge against a German Bund price decline.

Joe concluded his email to me by noting, "Anyway Jeff, you probably already know everything I just relayed.  Nonetheless, I found it fascinating and enlightening to hear how people who live in that 'fixed income world' (I am an equity guy) think about these things."

I know Joe Monaco and have always found him to be a good thinker. I also know Bill Kolhi, portfolio manager (PM) of the Putnam Diversified Income Trust (PDINX/$7.55). In terms of fair disclosure I own PDINX, so you know how I feel about Bill as a PM. I also thought I knew the stock market, but the past few weeks have been difficult. 

Yesterday, those difficulties mounted as the S&P 500 (SPX/2079.78) fell through what I consider to be a pretty important support level between 2090 and 2100. You could almost feel the trapdoor open when it became apparent that 2090 was not going to hold as the selling intensified. Subsequently, the SPX dropped to its 100-day moving average at 2084 that has contained previous declines. 

Intraday, that average also failed to contain the selling as the SPX descended to its intraday low of 2079.11, closing near those intraday lows. However, according to Jason Goepfert at the SentimenTrader, "Monday marked the 10th time during this bull market that the S&P 500 fell from a recent high to below its 100-day moving average. All 10 times, stocks rebounded over the next 1-2 days. Seven of those times, it marked the low for months. When the market's rebound was meek, it led to some further losses.

This is worth paying attention to as a potential change in character, and a less inviting market environment for long positions on a longer time frame." Once again the D-J Transports (TRAN/8334.68) got pounded, bringing out all the folks talking about the divergence between the Transports and the Dow that has been taking place since last December. We have commented on this divergence many times over the past six months, all to no avail, despite my bullish bias. Of course, Greece is being blamed by the media for the recent weakness.

Indeed, this morning the EU received yet another Greek proposal for reforms that could unlock new funding, but the S&P 500 preopening futures are having nothing to do with it as they are sinking by about 6 points. Such action has left the SPX on the verge of MAJOR breakdown in the charts (see chart) causing one market maven to scream, "John Wayne, where are you?!" ***ALSO JUST RELEASED: Bill Fleckenstein On Fred Hickey, A Stock Market Collapse And QE4, Plus A Bonus Q&A CLICK HERE.

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