EU Debt Crisis Spreads Worldwide

 

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

As the situation in Greece deteriorates further, Moody's announced today that it intended to downgrade 114 European financial institutions and 17 global banks. Hopes that China will buy up   EU sovereign debt to help prop up the faltering eurozone may wind up costing the U.S. more than it does China. 

The hostility between Greece and the EU/IMF/ECB bailout troika is palpable. Nevertheless, there are claims that a deal should be reached by Monday. Whether the severe budget cuts demanded will actually be implemented is another story. Greece's GDP is shrinking 7% this year and additional budget cuts will only make the situation worse. Athens is already riot torn and elections in April (assuming a democratic government still exists) are not likely to produce a government favorable to the bailout terms. The market remains increasingly skeptical of Greece's near-term future with one-year government bond yields reaching 528% today.

While all attention is focused on Greece, the European debt crisis permeates the continent. Banks have lent too much money to not just Greece, but to Portugal, Spain, Italy and Eastern European countries as well. There is a still a hangover of pre-Credit Crisis debt that wasn't resolved in 2008, but merely papered over with newly printed money. Moody's just announced it was planning on downgrading 114 European financial entities including 7 in Germany, 9 in Great Britain, 10 in France and over 20 each in Spain and Italy. Global banks Nomura and Bank of America are in line for a one-notch downgrade, while Barclays, BNP Paribas, Credit Agricole, Deutsche Bank, HSBC Holdings and Goldman Sachs could have their ratings lowered two notches. UBS, Credit Suisse and Morgan Stanley could be reduced three notches.

China with its vast foreign reserve holdings has been considered the potential savior of the eurozone. If this does occur, it won't be only China that is paying however; the U.S. will be sacrificing as well. China has previously announced it wants to diversify its reserve holdings. Since a disproportionate amount of these are in U.S. treasuries, the obvious implication is that it will be funding less U.S. debt as it funds more EU debt. The most recent figures for November 2011 indicate that China decreased its U.S. debt security holdings by almost 3%.

The EU debt crisis is likely to be us for some time to come. The situation with Greece is not stable and at some point it will have to leave the eurozone. Attention will increasingly focus to the other debt-ridden countries and the weak banking system. Just as the crisis spread from Greece throughout Europe, it will then spread from Europe to the rest of the world. We are already seeing this happen.

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Volatility is Back

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The market was up yesterday almost completely erasing the large losses from the day before. The beaten down financial stocks led the way up as if insolvent banks and brokers are now suddenly doing better. Well they're not, but their stocks were doing better in what is obviously a short covering rally that was pushed to the max by media reports of insider buying (more accurately portrayed as insider manipulation of the media, with full cooperation of the media itself).

The Dow was up 3.5% to close at 8228, above the psychological important level 8000. Nasdaq was up 4.6%. IBM reported (please note the use of the word reported as opposed to had) good earnings. Bank stocks were the big gainers however and this was true in Europe as well as the U.S. Both Citigroup and Bank of America were up 31%, not so difficult when you are selling in the single digits (the low single digits in Citi's case). Bank of New York was up 24%. And Tuesday's poster child for stock market disaster, State Street, managed a 15% rally. The rallies were more muted in Europe however. Barclays, which has lost half its value since the beginning of the year, was up 5% and Bank of Scotland only 9%. In Germany, Deutsche Bank was up 10% and Commerzbank 13%. Belgium's bailout baby, KBC, was still falling though after already losing 70% in the last three weeks and receiving a two billion euro cash injection.

The rally in bank stocks started out as the usual dead cat (or more appropriately dead bank) bounce. It really got going when news hits the wires about top management buying their own beaten down financial shares. Anyone who might think this was a case of blatant manipulation would have a lot of evidence on their side. When was the last time you saw a blaring headline, 'Insiders Dumping Bank Stocks', especially if it happened the day before? Lot's of luck in finding that one. Yet, yesterday's news trumpeted, Bank of America and JP Morgan insiders buying their stock. You would have had to read well into any article however to find out that in the case of JP Morgan, the buying took place last Friday before the stock was pounded down even more on Tuesday. As for the insight of bank management insiders, these were the people who brought us the current Credit Crisis and didn't see it coming. The head of Bank of America thought it was a brilliant move for the bank to buy Countrywide Financial and later on agreed to buy Merrill Lynch, two purchases that are destroying the bank. Now, we should assume his judgement has suddenly sharpened. Yeahhh ..... that can happen!

The earnings of financials are so bad they are disproportionately responsible for dragging down the earnings of the S&P 500. For Q4 of 2008, a 20% drop in corporate earnings is now expected. Before earnings season began a 15% drop was projected, but results have been worse than orginally thought. Wall Street analysts have once again underestimated how bad things are, just as Wall Street economists have done with the economic figures. I have never heard of anyone on Wall Street being fired for being continually and consistently inaccurate. In fact, it seems to be the ticket to getting to the top there. Something to think about for anyone who relies on insider purchases to indicate banks are turning around.

NEXT: Britain Points the Way to U.S. Economic Future

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.