Europe Continues Its Slide Toward the Precipice

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.

The Finnish finance minister has said all eurozone countries are making contingency plans in case the currency union breaks up. With debt downgrades, bond market anomalies, troubled bailouts, and austerity packages with their associated riots becoming the new EU norm, their worries are obviously justified.

Last night, Moody's downgraded Italy's government bond rating two notches from A3 to Baa2. This is just above junk status. Moreover, the outlook is negative with further downgrades possible in the near future.  So what happened in the Italian government bond auction this morning?  Did buyers  demand higher interest rates to buy Italy's increasingly risky debt as basic economic principles would predict? No they didn't. Italy sold €3.5 billion of three-year bonds at an average yield of 4.65%, much less than the 5.3% it had to pay last month.  How is this possible? Apparently Italian banks couldn't resist an urge to grossly overpay for their governments newly issued debt. The ECB was most certainly backing them up behind the scenes. If this is how Italian banks do business, can we assume that they're solvent?

There is little need to pose that question for Spanish banks. Recent data indicate that they borrowed €365 billion in June from the ECB — a record amount. This compares to €325billion in May. These numbers indicate that Spanish banks have been closed out of the interbank lending market (a good indication of insolvency). The highly troubled Spanish banking sector, which has €3 trillion in debt on its books, will be receiving an immediate infusion of €30 billion in bailout funds from the EU and another €45 billion in November. This represents 2.5% of its total debt and that amount is supposed to fix the problem. The actual funds needed will be many times that. It is impossible to say exactly how much because the financial numbers for Spanish banks are not reliable.

Spain seems to be following Greece's descent into a self-reinforcing economic collapse. This week Prime Minister Rajoy announced further budget cuts of €65 billion over the next two years.  VAT was raised from 18% to 21%. Almost a quarter of the Spanish work force is unemployed, even worse than Greece's 22.5%. Spain though seems to be making a more serious effort at fiscal austerity than Greece. According to reports in the German daily Rheinische Post, the troika on its latest visit found that the Greek government failed to implement 210 of the 300 budget savings requirements it had agreed to in exchange for its bailout money.

While interest rates are pushing against unsustainable levels in Spain and Italy, they have gone to theoretically impossibly low levels in northern Europe. Negative interest rates first appeared in government debt in Denmark and the Netherlands last December. Then Germany paid negative rates on some of its short-term bonds starting in January. This week, France sold six-month Treasuries at a yield of -0.03% and two-year bonds at -0.001%. Below zero yields are a sign of severe market stress.

The euro this week has traded below 1.22 to the U.S. dollar, but is slightly higher today. Investors should watch the 1.20 level. If the euro breaks and stays below this area of support, it could drop to parity with the dollar. The major central banks would intervene to prevent this though, so the ride down wouldn't be smooth.

Stock markets reacted bullishly in late June and early July to the news of further bailouts in the EU. Most traders didn't ask where the money would come from, nor if the plans were even legally possible. They may not be. The German constitutional court will be ruling whether or not Angela Merkel's promises to participate in the ESM (European Stability Mechanism) can go forward.  Even if they rule favorably, there is little actual money committed to the ESM. More money printing (and the ECB has already done quite a bit) is the only option left to fund the various bailout schemes to save the euro. Of course, it's logically absurd that a fiat currency could be saved by producing excess amounts of it. The same is true for trying to solve a debt crisis by taking on more debt.  But hope reigns eternal in the land of euro make believe.

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.

Market Selloff Might Pause Despite EU Debt Crisis

 

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.

The markets should soon find support on their current selloff, but this will only be temporary.  Europe's debt problems, which are at the epicenter of the current financial crisis, are not going to go away, they are only going to get worse until some realistic solution is found.

Stocks in Europe have been selling off for days and so have the euro and gold and silver. Only on Thursday did the U.S. markets start to drop significantly. Gold (GLD) and silver (SLV) managed to rally off deeply oversold conditions after reaching chart support around their lows from late last year. Even the euro (FXE) was trying to rally after getting close to its low from January. The major U.S. market indices are all approaching their 200-day moving averages (the Russell 2000 has already reached it). Some bounce should be expected at or just above those levels. Any upward movement should be considered to be a just a relief rally for now.

Once again the debt crisis in Europe has reared its ugly head. Greece is going to have new elections in June and an anti-bailout party is expected to win. Its credit rating was downgraded to CCC by Fitch on Thursday. An exit from the euro is now being seriously discussed in the halls of European power. At the same time, interest rates are rising in Spain and Italy to the levels where the Greek problem initially began.

Spanish 10-year government yields were as high as 6.38% this morning. The same Italian interest rates had reached just above 6.00% yesterday. Italy's rates were over 7.00% from last November to early January and Spain's were close to that level in November. The ECB then began a massive effort funded with money printing to drive them back down. It worked for a while, but as soon as the printing presses are paused, the market takes right back over.

The more serious problem is with the European banking system itself. Moody's downgraded 16 Spanish banks Thursday night and Spain had to partially nationalize Bankia last week. There was a run on Bankia Thursday and massive amounts of funds have been withdrawn from the entire Greek banking system. Contagion spreading to the major banks in the rest of the EU is a real danger. The LTRO (Long-Term Refinancing Operation) programs of the ECB have encouraged them to load up on the government debt of the failing peripheral countries. Many of the banks that did so were barely solvent as is.

More bailout programs from the central banks should be expected, but they aren't likely to work either. The real problems are with the non-functional economies. Spain is still building empty houses that no one buys and the Spanish banks are funding this activity.  Adding more debt to the problem is only going to make matters worse. Printing money to pay for that debt takes the problem to an even higher level. It all has to give at some point and it looks like the new few months will be one of crisis. 

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.


 

Greece Interrupted — Bond Swap is Not the End

 

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.

Greece is set to swap its privately-held government bonds today for new ones that will represent a three-quarters loss of the original investment. The deal will allow the country to receive 130 billion euros in funds from its second bailout. Like the money from the first bailout, those funds will eventually run out however.   

The Greek bond swap is the biggest debt writedown in history. Over 85% of  private investors (essentially banks, the deal does not include bonds held by the IMF or ECB) holding 117 billion euros ($234 billion) agreed to the "voluntary" exchange. The CEO of one major European bank described the transaction as about as voluntary as a confession during the Spanish Inquisition. The loss to bondholders is twofold consisting of a reduction in face value of 53.5% and then lower interest payments stretched over a longer period of time. All in all, private bondholders are taking an approximately 74% hit (assuming of course there isn't another writedown or Greece doesn't renounce its debt completely in the future).

Credit rating agency Moody's decided to call a spade a spade and declared Greece to be in default. Moody's line of reasoning in stating the obvious is that it considers a loss greater than 70% to be a "distressed exchange" (that's putting it mildly) and is therefore indicative of a default.  The matter is not merely academic, since there is a significant amount of credit default swaps (bond insurance) outstanding on Greek debt. On Friday, a committee of the International Swaps and Derivatives Association —  the regulatory authority on credit default swaps — ruled that the Greek debt restructuring was a credit event, and this will trigger payouts. How much CDS holders will receive remains to be seen.

Commentary from the EU political leadership on the swap deal was more mixed than after the first Greek bailout (statements back then were upbeat and generally confident that the problem had been solved and Greece was on its way to recovery). French president Sarkozy stated, "Today the problem is solved. A page in the financial crisis is turning." Christine Lagarde, head of the IMF said, "The real risk of a crisis, of an acute crisis, has been, for the moment, removed." German officials were far more cautious however. The French may be correct as long as their words are taken literally. The problem is indeed solved for today. That doesn't mean it is solved for tomorrow.

It is actually highly unlikely that the situation in Greece will be turning around any time soon because of the massive reduction in its debt load from the bond swap. If Greece had a functioning economy, there would be hope. However Greece's economy is heavily dependent on government spending and in exchange for bailout money the IMF and ECB have demanded severe cuts in Greece's budget deficits. Greece is now entering its fifth year of recession, after GDP contracted by 7.5% in 2011. Investment fell by 21% last year after sliding 15% in 2010.  For Greece to continue to operate at all, continued bailout money will be needed. Greece has effectively gone from a welfare state to a state on welfare.

Not surprisingly, some analysts are sounding a note of caution. Predictions are that the financial bleeding in Greece will show up once again later this year. Problems may arise even sooner depending on when the next election takes place (now supposedly in May) and how much power the fringe parties gain. The bond market doesn't seem hopeful either. One year Greek government bond yields were last at 1143%.  Such yields represent collapse, not solvency.

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.

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.

Eurozone Fiscal Problems Turn Violent

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.


Mass protests against austerity erupted througout the eurozone this week and in some cases turned violent.  Spain had its credit rating downgraded. Some yield spreads on peripheral countries bonds are reaching crisis levels again. Somehow though, the euro managed to rise on all of this negative news.

The left-wing union sponsored protests took place in Spain, Ireland, Greece, Portugal, Slovenia, and Brussels, where an estimated 100,000 people marched on EU headquarters. Spain had its first nationwide strike in eight years and rioters clashed with police who fired rubber bullets into the crowd. Most flights into and out of the country were canceled. Greece already had slowdowns during the past two weeks, but this time the Athens metro was shut down and doctors went on strike. Supermarkets are seeing food shortages there. The Irish parliament was blocked by protesters as a symbolic gesture of closing down the government.

Spain had its credit rating downgraded by Moody's from triple A to Aa1. All the other major rating agencies had already previously downgraded Spanish debt. In Ireland, the government announced that the bailout of the Anglo Irish bank could push the Irish debt to GDP ratio to 32%. EU guidelines call for this number to be 3% or below. Ireland says it will go to the bond market to raise the money. The yield spread between Irish and German government bonds rose sharply on Monday, hitting a record high. Irish and Portuguese yield spreads had already hit record highs on September 7th, when Greek yield spreads were the largest in four months.

Currency markets reacted to the financial chaos and political instability of the eurozone by bidding up the euro and selling down the safe haven U.S. dollar. This sounds totally and completely absurd because it is. No trader in their right mind would buy a currency with the problems of the eurozone. It is more than reasonable to assume the currency purchases came from the government run Euro-TARP bailout fund. While the eurozone member states are telling their respective populations that they are taking away the free lunch they have been serving all these years, they are making it clear that they are still willing to provide a free lunch to the currency markets. Of course, one day the bill for that 'free lunch' will arrive too and when it does the currency markets will turn violent and ugly as well.

Disclosure: No positions.

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

There is no intention to endorse the purchase or sale of any security.

Is Too Much Liquidity Creating New Investment Bubbles?

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.


Near month silver futures closed at a 30-year high on Friday and December gold futures hit another all-time high. Traders are looking for a breakout on the S&P 500 today as stocks have continued to rally throughout September. Liquidity is the driving force behind the market's move and it is unlikely the Fed will saying anything in this week's meeting that will indicate a reduction in its current massive pumping operation.

Unfortunately, it's not just the Fed that has the money spigot open full-force; the operation is global in nature. This evidence of this is that a number of government bonds of various maturities hit all-time high prices this summer. In a free market, this would normally be interpreted as an indication of an extreme economic weakness and deflation. While there is indeed significant evidence of slowing economies in a number of countries, particularly in the United States, purchases of government bonds can be influenced by central banks and treasury departments and can even be done by them as well. This can create significant distortions in the market. What is going on is that a lot of the excess liquidity is being used to buy bonds that then pay for day to day government operations.

Inflation sensitive gold is a much better arbiter of whether or not there is inflation or deflation. The gold market is not completely free of attempts at government influence of course, although there is far less of it than in the government bond markets. Gold is not only saying there is inflation, but that inflation is escalating. The U.S. Federal Reserve says otherwise. Of course, Fed officials also said that sub-prime loans wouldn't cause any serious problems in the financial markets. Yeah, you can really trust what the Fed says.

Outside the U.S, the European Financial Stability Facility, also known as Euro-TARP, is adding significantly  to financial market liquidity. The facility is currently valued at 440 billion euros. All three major rating agencies just gave it a triple A credit rating. Yes, these are the same rating agencies that gave securitized sub-prime loans triple A credit ratings. Certainly there was no reason to think that loans to people without jobs, without income, without assets and histories of defaulting on their debts were unlikely to be paid back. The same level of intelligence and insight was probably applied to the recent Euro-TARP rating.

The cause of the global real estate bubble was too much liquidity. We all know the ugly collapse that followed. Government officials have tried to reinflate the bubble, but reinflating a just collapsed bubble is not possible. This became quite apparent this summer when housing sales in the United States fell off a cliff. Creating new bubbles in bonds, commodities and stocks is possible however. Excess liquidity could cause all three. The collapse that would follow would be much worse that the recent Credit Crisis. Why are central bankers taking this risk?  Quite frankly, it's because they are just not as smart as the people who work for the rating agencies.

Disclosure: No positions.

Daryl Montgomery
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.

Will There Be a Summer Rally This Year?

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.


Summer officially begins next week and many investors expect this to be a bullish period for stocks. Markets are trying to rise from a very oversold condition, so early summer shouldn't disappoint. The underlying problems that created the recent sell off are still with us however and they are likely to weigh on the markets once again.

The debt crisis in Europe and the drop of the euro have been the major force controlling market action for the last couple of months.  The euro (FXE) has traded down from an intraday high of 151.27 on November 25th to a low of 118.79 on June 8th. It has been rallying the last few days, but despite mainstream media reports about improving economic conditions in Europe, the reasons are technical. The bad news has not ended either, but perhaps it is now expected and already priced in the market. Yesterday, Moody's downgraded Greece's credit rating four notches to Ba1. S&P had already downgraded Greek debt to junk status on April 27th, so Moody's move shouldn't have been surprising. France also announced a three-year budget plan to cut its deficit to GDP ratio to 3% by 2013. It will be around 8% this year (still less than the estimated 8.8% in the UK). Budget cutting is pervading EU countries in an effort to maintain the maximum 3% deficit limit, which was established during rosy economic times and became impossible to meet because of the Credit Crisis. Eurozone leadership apparently made no contingency plans in case anything went wrong, nor do they seem capable of handling a crisis when one occurs.

The other issue weighing on the market this spring has been BP's deep-sea oil spill in the Gulf of Mexico. This is already the biggest oil related environmental disaster of all time and the oil leak is not likely to be stopped anytime soon. Fitch downgraded BP six notches today to BBB (still above junk). President Obama will be addressing the nation tonight and will demand BP provide $20 billion in funds that will be used to pay off damages. This should be considered only a token sum of the actual final costs. Many of the biggest potential lawsuits against BP haven't even been filed yet. It took 20 years to resolve all the litigation from the Exxon Valdez spill, so BP could be in court until 2030. BP leadership apparently made no contingency plans in case anything went wrong, nor do they seem capable of handling a crisis when one occurs.

Budget cutting in Europe is only going to hurt the still fragile and highly socialized economies of the Eurozone. A return to recession is quite likely there if the cuts are actually implemented. In the U.S., reports indicate that the Federal Reserve is now putting together plans on what to do in case of a double dip recession.  So far, the good GDP numbers have been based on inventory restocking (or even inventories dropping at a lower rate) and not an actual growth of the U.S. private sector. The American economy has been expanding with the expansion in federal government deficits. The economic numbers could easily turn south again in the fall, as the deficit is supposed to decrease for fiscal year 2011 (beginning this October 1st). At least the Fed is making contingency plans in case something goes wrong, but it is not clear that they will be capable of handling a crisis when one occurs.

In the short-term though, the stock market seems to want to trade on the technicals, with possibly a little money pumping from the major central banks helping it along. The euro is overbought and needs to rally to resolve this condition and the U.S. trade-weighted dollar (DXY) is oversold and has hit major resistance in the 88 area so it needs to sell down. The period around the July 4th holiday is usually a positive one for U.S. stocks. Late July can be quite negative however. It is best to look at the markets with a short-term perspective at the moment.

Disclosure: None

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.

Moody's Sovereign Debt Assurances Should Concern Investors

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.


According to ratings agency Moody's, credit ratings of the world's four largest Aaa-rated sovereign nations - the U.S., UK, Germany and France - are currently "well positioned despite their stretched finances". The agency does however admit that risks have grown. Based on Moody's past actions, this should give investors little comfort.

In the current Greek debt crisis, Moody's was behind S&P and Fitch in downgrading Greek government debt. As reported in the Wall Street Journal, it took Moody's until December 23rd to make a downgrade of just one notch from A1 to A2. After the elections on October 4th, the Greek government admitted it had lied about its budget deficit and its ratio to GDP would be 12.7%, several times higher than previously reported. Even though the original numbers from the Greek government should have seemed unbelievably rosy, this apparently didn't make the rating's agencies suspicious. Are they likely to be more suspicious of the numbers generated by the politically powerful major countries that get their top ratings?

Prior to the Greek crisis, there was Iceland. According to the Central Bank of Iceland's website, Moody's downgraded Iceland's long-term debt obligations in domestic and foreign currency to A1 (still well within the investment grade range) on October 8, 2008. This was the same day that the Iceland's krona peg to the euro collapsed. Iceland had already nationalized major banks Glitnir and Landsbanki the month before. The Iceland prime minister had stated on October 6th that there had been a real danger of national bankruptcy. That scenario would have justified a rating of C from Moody's, many notches below the October 8th rating.

Investors should also not forget the role of the rating's agencies in giving securitized sub-prime loans top triple A ratings (Aaa in the case of Moody's). Moody's had to downgrade more than 5000 mortgage securities in 2007. The ratings agencies in general blamed mortgage holders that turned out to be 'deadbeats' and not their own practices. They would like us to believe that it was unreasonable for them to have assumed that people with spotty employment, a history of not paying their bills, and who bought houses they couldn't afford would default on their mortgages. If the rating agencies can ignore those problems, investors should ask themselves what problems they are ignoring with U.S., UK, German and French government financing?

How did the rating's agencies do with problem companies? Moody's downgraded Bear Stearns to Baa1 from A2 on March 14th, 2008. The Baa1 rating is an investment grade rating for Moody's (there are five speculative rating's below that level). That downgrade took place on the last day that Bear Stearns' stock traded. Moody's was still maintaining it was an investment quality company. The rating agencies did a little better with Enron, downgrading it to below investment grade four days before it declared bankruptcy. The stock had already lost almost all of its value before the downgrades, so the move was too little too late.

In its current analysis of sovereign finances, Moody's maintains that the major countries will be able to maintain fiscal stability because interest payments are reasonable compared to government revenues. However, government debts are increasing rapidly because of weak economies. If the global economy continues to stay weak, interest payments will go higher , tax receipts lower and debt will continue to pile up. Recovery, on the other hand, will raise interest rates substantially and this could overwhelm tax receipts and create a major debt spiral. The rating agencies are unlikely to consider that the major countries are caught in a lose/lose situation though since they seem to reserve their most speculative ratings for basic logic and common sense.

Disclosure: None

NEXT: The CFTC and Manipulation of the Silver Market

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.

Desert Bubble Bursts, Blows Sand in Market's Face

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.

Our Video Related to this Blog:

America was on holiday for Thanksgiving, but London unexpectedly joined it with a halt in trading for over three hours on Thursday. The LSE (London Stock Exchange) computer system just simply stopped functioning. It couldn't have come at a worse time. Major selling was taking place before the trading halt because Dubai's state-owned Dubai World announced a 6-month 'standstill' for payment of its massive debt. While the mainstream financial media described this action as a potential default, failure to make debt payments in a timely fashion is a default, period. If it walks like a duck and quacks like a duck, it's a duck. It is estimated that Dubai World has $60 billion in foreign debt outstanding with British and European banks holding two-thirds of that. The ever alert U.S. rating agencies Moody's and S&P promptly downgraded Dubai World's debt, once again giving the appearance that they are the last to know when a financial problem exists.

Dubai's problems were already known during Asian trading on Thursday ( Wednesday night in New York) and the Shanghai market dropped 3.6% and the Hang Seng in Hong Kong was down 1.8%. Things got worse in Europe Thanksgiving day. The unexpected technical problems on the LSE (not the first time this happened by the way) caused worry to turn to panic. This is a typical reaction to traders when they can't access a market and there is some bad news floating around. They will sell down other markets which are open and when the closed market reopens, there is a bigger drop than there would have been. Banks stock were particularly crushed on Thursday, bringing back memories of last years Credit Crisis. Royal Bank of Scotland was down 7.6%, Barclay's down 6.7%, ING down 6.4%, Deutsche Bank down 5.7%, and Standard Chartered down 5.7%. The FTSE in England was down 3.2%, the DAX in Germany down 3.3% and the CAC-40 in France down 3.4%

Credit default swaps (insurance on bonds) rates rose precipitously throughout the Gulf region - another blast from the Credit Crisis past. The problems in Dubai have been brewing for a long time and it is hardly the only place in the world where there are financial problems remaining. It is merely the first new blow up. Dubai's faith was sealed with the general global collapse in 2008. The government has been stonewalling its creditors ever since, assuring them everything was fine. Earlier this month, the ruler finally told Dubai's critics to shut up. In February, Dubai received a $10 billion bailout from the UAE central bank. On Wednesday, another $5 billion was forthcoming.

Predictably, money moved into the U.S. dollar as markets reacted to the latest crisis. Considering the the trade-weighted dollar plunged on Wednesday, falling as low as 74.23, a rally was not unexpected as is. The yen hit a 14-year high against the dollar and rumors are rife that the Bank of Japan might intervene to drive the yen down, like the Swiss central bank did on Thursday when it sold francs against the dollar. Spot gold managed to eke out another all time high by a couple of points in early overseas trading Thursday after its strong rally on Wednesday. It then fell as low as $1180, but then bounced back up to $1190.

Stocks in Asia got clocked again in Friday trading. The Nikkei in Japan was down 3.4%, closing at 9082. For those who haven't been paying attention, the Nikkei broke key support at 10,000 a while ago - the weakest stocks market usually sell down first. Shanghai was down 2.4%. Hong Kong and South Korea had the biggest damage though, falling 4.8% and 4.7% respectively. Traditionally, a one drop of 5% or more is considered a crash. .

The global market contagion moved to New York this morning. The Nasdaq gapped down 58 points or 2.7% and the S&P 500 was down 25 points or 2.3%. The Dow, which takes a long time to open when there is major news, was down around 200 points or 2.0% on the first print. The dollar was as high as 75.58 today so far. Oil got hit more than any other asset and was down 5% at one point falling as low as $72.39 a barrel. Gold plummeted to $1139 around 2AM New York time, but has already traded as high as $1178 today. All the major European markets gapped down strongly, but turned positive for the first time around 7:30AM. They will close up nicely.
U.S. markets close early today and volume is incredibly light which allows for large moves in either direction. Monday is the key day to see if there is going to be any long-term impact from the Dubai fallout.

Disclosure: Long gold.

NEXT: Dubai Default Damages Denial

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.

More on the Real Estate 'Recovery'

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 bubble in real estate caused the Credit Crisis and cleaning up the mess in real estate is the key to getting the financial system and ultimately the economy back to normal functioning. Articles have appeared in the mainstream press stating that residential real estate has bottomed and prices are headed up. You would have to ignore the overwhelming amount of bad news coming out of the real estate sector in order to believe this.

The Mortgage Banker's Association recent numbers for mortgage applications for home purchases are falling. The four-week moving average is down 0.7%. So demand is down during the heavy buying summer season. So prices are supposedly going up, even though demand is falling. Well that could happen if supply was falling even faster as is the case with oil. Don't hold your breadth though. The worse form of real estate supply is still rising rapidly. Mortgage defaults are expected to come in at 3.85 million this year compared to 2.7 million last year according to Moody's.com.

It is estimated that 14 million (out of a total of 52 million) mortgage holders in the U.S. had negative equity in their homes by the end of the first quarter of this year. Moody's predicts that that number will rise to 17.5 million by the first quarter of 2010. In a recent report, Deutsche bank estimates that nearly half of U.S. mortgage holders will have negative equity in their homes by the first quarter of 2011. By the first quarter of this year, 50% of subprime borrowers were underwater as were 77% of Option-ARM mortgage. Mortgages on homes with negative equity are where defaults and foreclosures come from. There seems to be a potentially unlimited supply of these in the next few years.

Home builder Toll Brothers earnings report today illustrates quite clearly how the mainstream media is handling real estate coverage. The report was described as upbeat. Toll said that signed contracts were up 44% and only 9% of buyers backed out. While the percentages look good, the total number of homes sold were only 792. Toll also stated that demand was so strong that it scaled back on incentives. Revenue was down 44% however because of much lower prices charged for their houses. Slashing prices at that level seems like one giant incentive to me. The market is also so 'good' that Toll is writing down its land and house inventory by $90 to $160 million. The stock of course went up on the upbeat news of collapsing revenue and massive write downs. You should assume that the overall U.S. real estate market is just as 'upbeat' as the Toll Brothers earnings report.

NEXT: Fed's Actions Speak Louder Than Words

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.

IMF Notices Recession; Possible Sovereign Defaults

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.

Our Video Related to this Blog:

In what could only be described as 'you heard it here last' news, the IMF (International Monetary Fund) has just released a report that predicts the deepest global recession since the Great Depression. What caused this great revelation is a mystery. Perhaps they finally started reading last years papers and realized all the economic news around the world was bad. We'll probably never know. Meanwhile, U.S. News and World Report has complied a list of countries in danger of default - and get this, Argentina is on the list. Well, that is a shocker! A country that has defaulted on its debt over and over and over again is at risk of defaulting again. Who could have predicted it?

I have often said economists are the last people to know about a recession. Apparently, international economists take this concept to an extreme. While anyone who doesn't live in a cave has realized for at least a year that there have been serious global economic problems (the New York Investing meetup itself predicted recession in December 2007), the IMF has finally come out with a prediction of global contraction in 2009. They are predicting a 1.3% drop overall and a 3.8% drop for the advanced economies. The IMF is also predicting that the major economies will have budget deficits of 10.5%. Who the money is going to be borrowed from when almost every government has a big deficit was not in the report (they should have just included a picture of a big printing press). The current IMF forecast is the fifth downgrade for global growth in a little over 6 months. Thank you IMF for that timely update.

As for the risk of sovereign defaults, this is based on information from the ratings agencies S&P and Moody's, the people who gave subprime loan securities triple A ratings (well, there's no question that they're on top of things). Pakistan, which already defaulted 6 months ago is in danger of defaulting again. The usual Eastern European suspects, the Ukraine, Belarus, and Latvia aren't in good shape either (and you could probably add three to four more countries in the region). Closer to home, Mexico is in danger of default. It is only a question of when and not if for a possible Mexican default. Mexico gets a significant percentage of its federal revenues from the rapidly declining Cantarell oil field and its budget problems are only going to get worse. The U.S. will have no choice but to bail out Mexico. The IMF will take the lead for the other countries (picture that printing press again). Countries not on the list include Greece, Portugal, Spain and Ireland. Well, maybe next year.

As an investor you should be concentrating only on what is likely to happen sixth months in the future. News that everyone already knows is irrelevant because it has already been priced into the market. That doesn't mean that the mainstream media won't announce it in blaring headlines or give it dramatic coverage. You need to ignore all of these superficialities. You also need to consider whether or not you are the last to hear the news. If a stock price has already been going up long before some good news has been officially announced, you can be pretty assured that lots of other people knew what was going on long before you did.

NEXT: The Gold is in Eastern Capitalism

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.