US stock indexes finished 0.1% – 0.2% higher today but small stocks were lower by more than 0.5%. European stocks were down a bit while Asia was mixed. Both gold and oil were up over 2% today. You should probably have one or both in your portfolio.

Most bonds were down slightly again today and the dollar was weak as Greece got a second bailout package after a lot of drama. The Greek drama is far from over but we are at another intermission. This is no 3-act play; this will go on for years and not because it was so popular, just that Greece’s needed reforms will mean much greater decline in their standard of living. That keeps tax revenue declining and support services (expenses) increasing and so it goes.

Think of Greece as being a house in danger of foreclosure. The mortgagees keep getting loans even though they should have moved out long ago because their business is really in a downward spiral. They need a smaller house with less debt but the process is being really strung out, hoping the business will come back, which I doubt because so much was built on cheap loans, corruption and dectption, producing for a while an artificially high standard of living.

The Wall St. Journal today reported on recession hitting Europe again as austerity measures in certain countries pull down the European Union as a whole. Most economists don’t expect a deep recession. Here is the excellent chart from the article showing the recession by country. Please click on the image to enlarge it for easier viewing.

This is a good place to mention my error yesterday that Greece’s economy shrank 7% last quarter. As you can see by the graphic today, Greece’s economy shrunk by an astounding 18% last quarter. You have to go back to the Great Depression of the 1930s to see that kind of drop in America. The same goes for Greece’s unemployment rate of 21% and rising. Don’t be surprised if it hits 25%, perhaps even close to 30% as the year goes on. Last spring, I taught in Macedonia, the country just to the north of Greece and unemployment there was 40%.

France did grow slightly and Germany’s economy dipped less than 1%. It really is becoming a two-tiered Europe with Greece, Spain, Portugal, Ireland and Iceland in the lower tier. They don’t call the PIIGS anymore. Somebody apparently objected. Try GIIPS, as in gipped the rest of Europe out of hard-earned money to pay for profligrate spending and reckless indebtedness.

China is now the largest gold market. Chinese demand for gold keeps growing as more people move up the economic ladder. Also, the Chinese New Year ushered in the Year of the Dragon, an especially auspicious thing in Chinese folklore and gift giving has been higher than before.

The Chinese are much more likely than Americans to see gold as a store of value, thus a legitimate investment alternative to stocks. Europeans are also buying more gold, as are central banks.

It’s been volatile but the stock market after opening in line with yesterday’s drop rallied nicely. Several of the last few days have had drop or pops as the 5 day chart to the left shows. The market so far is only slightly higher than it was yesterday but that’s OK. A pause to allow a higher market is one way of working off an overbought situation like we have now.

Economic reports on jobless claims, housing starts and factory activity were all mildly postive today.

Yes, I know, more about Greece. But, Greece is center stage in the investment world right now. It is having trouble getting an austerity package done with enough credibility to make its European lenders comfortable. Soft deadlines keep passing and German and other creditors are increasingly demanding more austerity and more certainty that austerity will actually be enacted.

Meanwhile, the Greek economy spirals down with more and more layoffs. Full 1/3 of the country works for the government with generous salaries and pensions largely paid with borrowed money. Overall unemployment is now up to 21% and last quarter the economy shrank again, this time at a huge -7% rate. Yes, the government needs to shrink but there has to be economic growth to provide jobs for laid off public employees. Yet each quarter jobs are much harder to find.

The only way out of this mess really is for Greece to abandon the Euro and go back to the Drachma at a very discounted rate, thus cutting all their debt. The debt is piling up rapidly as Eurozone finance ministers continue to apply the wrong remedy. They are acting as though Greece is short on cash. No, Greece’s main problem among many is a crippling amount of debt that continues to rise as the economy falls. You can’t solve a debt problem by loaning the debtor more money.

I hope the U.S. is paying attention because our debt is also rapidly mounting and the president’s just announced new budget does not even propose to spend less money than the record pace of last year. And, as the total percentage of people employed keeps falling in the U.S. (see the Feb. newsletter) it calls into question the falling unemployment rate.

Today, U.S. stocks will likely finish near their lows for the day, down 0.6% on the S&P 500 index after failing once again to get over 1,355. Gold is up 0.5%, oil is up 0.7% and most bonds are down slightly. Retail sales, reported today were up but less than expected.

February is usually one of the poorer months for stocks and according to Art Cashin, one of the best guests CNBC has on, mid-February is often when a pullback begins. Markets are fairly overbought right now. In the late December through today portion of that rally, it has been most everyone participating except last year’s darlings, the high-yield stocks. I wouldn’t sell them yet because they will do much better on any significant market pullback.

The stocks that have been leading are the banks. Usually the strongest stocks in the long-term bull market (2002-2007) that crashes (2008) lag the subsequent recovery, not lead it. That’s why some see the recent rally as just a small bull market in a longer term downtrend.

Gold is up slightly today and oil is up 2.5% today. Some of that certainly has to do with lingering tensions over Israel’s widely broadcast posturing over stopping Iran’s nuclear program and many are predicting some sort of war could start anytime. I am not so sure about that. Meanwhile things continue to be bad for living in Iran’s puppet state of Syria. I don’t see the revolutionaries being successful there anytime soon.

And then of course there is Greece. Sigh. There are rumors that the austerity package that the Eurozone finance ministers told Greece it had to pass and did this weekend may not in the end be enough to satisfy. Part of the reason for that is that the man likely to be the next prime minister of Greece is saying that this austerity package ought to be renegotiated after the upcoming election. Meanwhile, there were riots in Greece this weekend over the latest austerity package. Thirty buildings were burned.

The new turn to real skepticism by the Eurozone finance ministers is important. I think it marks the turning point in relations between the EU and Greece and if persists could spell real trouble for more Greek bailouts and Greece’s future as a full-fledged member of the European Union.

No sooner did I comment on how many days the market had been up so far this year and we had a drop of 0.7% in the US and double that in Europe. Gold was down as were bonds and oil.

Usually when confidence in the stock market gets too high, the market will fall. The recent survey of institutional investors, who represent the vast majority of trading showed 52% bulls and 20% bears. That’s not extreme, but its pretty high.

It won’t surprise you if I say that the main worry right now is Greece. The Eurozone finance ministers told Greece that the very hard-won agreement with private creditors was not austere enough and that Greece would not get the bailout needed to avoid default in March, that is, unless it came up with another 34 billion in austerity measures. Meanwhile, Greeks are protesting in the streets of Athens over the program that the EU finance ministers say is not tough enough.

Not only do the ministers want an agreement with more cuts but they want parliament to approve it and even more, the individual politicians to sign a pledge that it will be implemented. Too many austerity measures have been passed and not implemented.

This is really coming to a head and while no one wants Greece to default, or so they say, I think the odds of Greece leaving the Euro zone are rising, perhaps as high as 40%-50%. If that happens, it will not be good for European stocks, nor ours’. Contagian will be on the lips of European traders across the continent and the recent improvement in Italian and Spanish bond markets will unravel. I’m not predicting it yet because the situation is too complicated and drawn out to be able to make pronouncements like that at this point. But, the likelihood is rising.

The markets will likely trade each day next week on whether the Greek news is good or bad. I won’t be surprised at all to see a 3%-5% pullback in US markets over the next week or so, depending on the news from Europe.

US markets were up again slightly today, so what else is new? You can’t fill one hand counting the number of down days so far in 2012. No one is complaining of course. I’d like ten more months of what we’ve had so far in January and February, please.

Gold and bonds were slightly lower today and world markets were mixed and none were up or down even 1%.

The Greek tragedy plods on. Who wrote this play? It seems Greeks and their private creditors are closer to a short-term resolution, but again what else is new? Politicians agreed to strict austerity measures but the unions didn’t and so union workers (over 50% of Greeks belong to unions) are on strike again.

Oddly, in the new agreement pensions would be cut by 15% but the strange Greek practice of paying the huge number of government workers for 13 or 14 months instead of 12 months, known as the Christmas bonus stays in place. Good grief. The Germans are understandbly tired of throwing money at this kind of idiocy.

The market was up slightly today while it waited for concrete news on Greek creditors and politicians. Gold was up 1.5% and is up almost 12% since Jan 1. Silver is up 23% in the same time. The YTD gain in the two precious metals are probably the result of inflation fears and rebuying of positions sold at a profit six moths ago when traders needed to raise cash for margin calls in falling stocks.

The inflation fears, thus gold buying, are due to (1) the huge liquidity injection the European Central Bank made when it announced it would offer three year loans at extremely low interest to banks and allowed them to use troubled sovereign debt as collateral. This put a lot of new money in circulation and stopped much of the selling of sovereign bonds by banks.

(2) At the same time, the US Federal Reserve started hinting that it might embark once again on its own liquidity program which would be QE III. And, (3) the Fed announced that it would keep interest rates ridiculously low (actually they used a different term) until 2014. That also stirs up the inflation hawks.

And, (4) in China, lots of gold is being bought for gifts in the Year of the Dragon. Finally, (5) Central Banks in emerging markets have been diversifying into gold, including China.

So there you have five reasons people are buying gold. Add to that as (6) people who buy what is going up, especially if it adds diversification to their portfolios.

This year, every time the US market sells off in the AM over news from Europe’s debt mess, it gains the loss back by the end of the day or by the next day. Today was another repeat.

Greece was supposed to have completed a deal with its private creditors today in order to have done in time the early steps needed to avoid a default on March 20. It is now nearly 11:00 PM in Greece and no deal is done. Creditors are apparently unwilling to do a voluntary deal that forces them to take big losses and lengthen the time for which they are exposed to Greek debt issues, at least on the terms being currently offered.

Germany seems to be increasingly indifferent on whether there is a default, apparently feeling that the EU could withstand a Greek default and still remain in the Eurozone. They then might loan Greece more money after the bonds default.

Everyone seems to agree that Greece has been willing to agree to austerity but very slow to implement it, like the child that says “sure” to a request and dawdles their parents’ patience has finally completely run out. It is also agreed that austerity is depressing the Greek economy, making repayment less likely. In addition, 50% of Greeks are unionized and on strike today. Last, new elections are due in eight weeks and we all know how reluctant politicians are to promise more austerity and pain to voters just weeks before an election.

German opinion is correct I think, when it portrays Greece as an incredibly spoiled child who refuses to grow up and take responsibility for its problems and making restitution. If you have ever had or known a troubled teen hooked on self-destructive habits you will have an idea of the likelihood that continually loaning them more money and expecting a payback will work.

While the markets are pricing in something like a 20-40% chance of a Greek default, my own opinion is that is is much higher than that, especially if you consider an “orderly” default, sort of like our Chapter 11 bankruptcy for US corporations. Look how well General Motors is doing after going such a default a couple years ago.

My guess is that even with all the seeming support for stocks that stocks worldwide will have a hard time making higher highs while the Greek mess plays out. They probably won’t fall much either.

The big question immediately is how long it will drag on. Portugal is in real trouble too and fortunately it is very small, as is Greece in the grand scheme of things. The bigger troubled countries like Italy and Spain have done much better since the ECB made very low cost loans available to them recently so contagion fears have receded quite a bit, one reason why Germany seems to be so little worried right now.