Is A Greek Bailout Priced Into The Market? I think so.

  As expected, Europe is on the radar of investors and traders due to the potential fears of a Greece exit and the potential contagion affects. Other indebted nations in the Eurozone are not helping the situation either. At this point in time, there are basically two outcomes that are on most trader's minds right now.

1. Greece will receive another liquidity injection by the ECB, confidence over the short-term horizon will be restored, however the economic displacement will continue to stay or grow worse. Bond yields in Greece and other PIIGS will decline, along with a brief rally in risk on assets.

2. Greece will fail to elect a sustainable government, confidence will continue to drain in both Greece and most of the Eurozone, Greek bank deposits will decline at a faster pace, Greece bond yields will rise dramatically, and Greece will be compelled to leave the Eurozone.

Given previous occurrences and the fact that sustaining confidence is of utmost importance in Europe right now, I think the market is expecting a Greek bailout. Thus right now there is a premium to purchasing risk-on assets. The $VIX is also still a relatively low levels and has the potential for a much stronger down turn.

At this point there is no real resolution to Greece's economic woes except for outside investment (which is highly unlikely unless Greece is able to somehow make itself look more attractive; a lower currency). We are beginning to see a snowball effect, as each time Greek bond yields rises, it sets off further uncertainty, more bank withdraws, etc.

Although the short-term effects may be uncertain and harmful, I think a Greek exit would be a good thing for Europe and the Greek economy. Greece would then benefit from a lower currency relative to the euro. Germany would have less of a burden to worry about, and more focus would be put on the other PIIGS (or should I say PIIS?)

My recommendation? Given the fact that I think there is a premium to purchasing risk-on assets right now, I think a bearish position in U.S. and global equities, long volatility, and long U.S. and German bonds would be a good position going into the Greek elections this coming June. The risk to reward is much more compelling being short, and the potential rewards are much greater than a relief rally from another bailout. Technically, the market remains broken, and I think a bounce higher should be shorted.