Yesterday the market dropped 1.74% as people woke up and realized that Europe is broke.  They had obviously forgotten this the day before when the market was up 1.26%.  Today they aren't rioting in Greece as they wait for plan A B C D E F G from the newly appointed cabinet.  Not to be outdone, the people in Vancouver are also upset ---  because their hockey team lost.  (I guess it's all about perspective.)

Those Wall Street apologists are forgetting a few key differences between now and then:

• Despite the 110 billion euro loan package last year, Greece is projected to run out of money early next year without more financial aid.  In other words, the 110 billion euros are basically gone.  Remember, I said last year that Greece would NEVER be able to pay back the money.
• Last year the U.S. economy slowed AFTER QE1 ended at the end of March.  This year the economy is slowing DESPITE QE2 continuing through the end of June.
• Inflation was not a problem last year.  This year inflation is heating up rapidly, handcuffing the solutions Central Banks can use.

I thought last summer that it felt more like the spring of 2008 when Bear Stearns was failing.  The Fed/ECB/IMF made a stick save (maybe Vancouver's goalie should have gotten tips from Ben Bernanke--it may have saved millions of dollars in damages to their beautiful city).  This saved a major crisis last year, but here we are again with last year's bailout money all gone and Greece again threatening to bring down the European banking system.

Whenever things get tough in the market I like to hear Art Cashin's take on things as he has always had a good read on what is happening on the trading floors.  Here are some of the things Art said this morning on CNBC:

• This is feeling a lot like the days before Bear Stearns failed.
• Traders are worried that this is more than a European banking problem & are worried that the real issue is the Credit Default Swaps (CDS) (because the banks have repeated the same mistakes they made last time.) 
• Everyone is asking "who is exposed?"  This is leading to rumors and fear mongering.
• We are seeing signs of major liquidity problems in Europe -- just like we saw here before Bear failed.
• This situation is not stable, which makes me uncomfortable going into options expiration on Friday -- similar to the feeling heading into another expiration I remember, namely in October 1987.
• Yesterday was not 'capitulation', just some nausea.
• Everyone is "crossing their fingers" that this doesn't get worse.

So while Wall Street brings out their cheerleaders reminding us how everything worked out fine in 2010, I would encourage you to remember that they were doing the same thing in 2008.  Anybody remember this from Wall Street's #1 cheerleader?

We have already moved to "transition" mode, with all of our programs showing greatly reduced exposure and new INA & EPA clients have been left in money market since May 24.  Our Volatility System did jump back in yesterday on the steep sell-off, increasing the exposure there to 74% (from 54%).

While one day does not make a trend, I thought yesterday's performance in our systems was a good example of how much our "transition" stage reduces losses.  Yesterday was the first down day since we entered transition mode.  Look at how much of the 1.74% each program participated in:

• Income Allocator (INA) = 3%
• Absolute Return (ARA) = 35%
• Enhanced Portfolio (EPA) = 32%
• Enhanced Growth (EGA) = 44%

Looking at our ENCORE portfolios, all are handily beating the S&P 500 this year with returns ranging from 1.3% (Growth ENCORE) to 2.5% (Income ENCORE).

I don't know how many of you remember what 2008 (or even the summer of 2010) felt like.  I do & I know that the complacency that I am seeing from the talking heads on TV are doing nothing to help the individual investors.  Far too many individuals have entirely too much stock exposure in their portfolios.  Hopefully we can convince enough of them to evaluate the risks they are taking in their portfolios so they are not left holding the bag again.