That Was The Week That Was – 2nd Week September

Greek Default has been in the news for weeks and has battered and scrambled domestic and world stock markets. It’s almost as if investors never heard of a country going into default or having to have its currency or bonds renegotiated. The fact is, dear reader, that there are literally oodles of countries that at one time or another were just plain sovereign dead-beats.

This time, however, we may possibly be on the verge of  the real deal – .  A global depression. The problem is not just with Greece my friends but the Euro that binds them together. Add the politics of 17 countries  &  the fact that European banks have not recapitalized like the banks in the United States have and you have serious issues. Now mix in our domestic companies that depend on the world for business and a worldwide recession is possible.

Morningstar, last week, interviewed David Herro, manager of Oakmark Funds, who said there was no doubt that Greece would default at least on some if not all of its debt. The people of Greece and their government haven’t the propensity to go through austerity, is how Herro explained it.

Getting back to the history of sovereign defaults, we don’t have enough fingers and toes to count those nations that just in our lifetime had to restructure, at least once, their messy money spending.  And, this isn’t even new news but goes back to around the 4th century or so when Greece was one of the first to have to re-jigger their debt. For Greece this isn’t their first rodeo. In a way they are the European poster country for spending and default.

European Countries were isolated by their currencies. A Greek default in 1940 was substantially less risky globally than today.

Let’s look at a few sovereign defaults just in our modern times: In 1978 our friends in Turkey ended up in the soup line. They were no strangers to financial impropriety. That was the fourth trip since the 1800’s for them. The first in 1876. Today they look to be a prosperous leader for the Middle-East. In 1981 it was Poland and Romania that needed a hand- up. In 1982 it was Cuba, the Dominican Republic (a country that made going broke almost a national pastime with four visits to the debt line).  There was also Ecuador, and they came back and did it again in 1999, and that was number six for that  country. There was a slew of South American countries biting the bullet back in 1983. The big default we always think of was Russia in 1998 and everyone thought their default would create world ruin. Today they seem to be getting their act together, albeit slowly and crudely. In 2001 we had Argentina and 2004 Grenada. There were more defaults than the one’s I report here but none that drove the world to insolvency.

The problem with a Greek default will still be with the banks… and the cascading effect. So far European banks are loaded with sovereign debt of Greece, Spain and Italy. Those banks underwrote bonds in the same haphazard manner as ours did with mortgages. The difference today is that the big European banks do not have the liquidity to survive a substantial implosion. To give you an example imagine if the U.S. allowed Bank of America, Citi, Goldman Sachs, JP Morgan Chase and Morgan Stanley to fail. Just the bankruptcy of Lehman Brothers tipped the world into a global depression. The next six to 12 months may shift the world economies one way or the other. The stronger European countries, and their citizens, seem to be getting fed up coming to the aide of their weaker and less than frugal neighbors. According to the WSJ citizens in European country’s with solid economies are sick and tired of handing out their money in the form of higher taxes only to see no result from their poorer cousins. European leaders appear to be, as of last Friday, lackadaisical in confronting a possible explosive situation. Moody’s downgraded several French banks last week that are holding an extraordinary amount of Italian and Greek bonds. Treasury Secretary Geithner was in Poland last week and expressed his frustration with Europe’s lack of unity and action in the debt crisis.

The Treasury Secretary has suggested to the Europeans to create a modified TARP, used to bolster U.S. banks, and as of this writing no interest in the idea by European leaders. Given the circumstances and news, as we know it, the European situation appears to be more serious than we’ve been led to believe.

Doomsters such as George Soros see a cataclysmic end-game. Others, such as Howard Gold at MarketWatch see a painful drip, drip, drip, with odd moments of extreme panic. Fearful investors may indeed lighten up on European stocks and increase their bonds and cash. 

Greece Holds Emergency Talks Over the Weekend on Cutbacks: In a nutshell the Eurozone doesn’t trust the Greek government and their people to hold to their measures of austerity. At a weekend meeting European finance ministers took Greek officials to the woodshed and warned them that they may not get the next tranche of $11b billion in October if progress in cutting their debt is not seen by their financial inspectors. I’ll keep you informed as this unfolds.

 For the week markets up 5.35% on the hope of a European bailout.   Gold down, Oil up, CRB Index down.

Mary Ann Bartels,  technical analyst at Bank of America/Merrill Lynch, said that there is a chance that the S&P 1100-1020 holds but there is a 50% probability that the S&P 500 tests 985-910. S&P 500 closed at 1216 this past Friday, best week since July.

Markets popped in the last hour or so of trading Monday. The dollar continued its strength, which is historically bad for stocks and commodities. Worrisome is that analysts are split on either seeking safe haven for their clients or finding buying opportunities. One analyst on CNBC said the S&P could fall 20% and the 10-year Treasury hit 0%.

Global Arena’s Cohn said on CNBC.com, ‘We may see lower prices and it may be a thousand points on the Dow. But the fact is it won’t last long.’

Who doesn’t love Amazon.com, baby? In 2012 China’s answer to Amazon  360buy.com owned by Beijing Jingdong Century Trading Company, will have its USA’s IPO, expected to raise $5 billion.

Zounds! 50% of Europe’s Money Managers expect a recession in Europe within a year! According to MarketWatch.com reporter Barbara Kollmeyer, sentiment toward the U.S. saw an improvement, the latest survey also showed, with global investors restoring an overweight position in U.S. equities, and only 9% expecting the economy to weaken in the next year. 30% also saw a weakening in the Chinese economy, up 11% from a year ago.

Ford putts along. In August the first insider buying was reported and in Barrons.com  Chairman Ford bought more shares for the second time in a week. He owns more than 4 million shares. Shares are down 39% year-to-date. On Thursday the company announced paying down even more on their debt.

A Rogue Trader at UBS lost more than $2 billion in Unauthorized trades! No surprise but he was trading like that for 3 years before the bottom fell out. Bank compliance? The bank will survive, say insiders, but stock price damaged at a time when $2billion is some serious money. Investors, meaning you me and the candlestick maker, should always check confirms and statements for any unauthorized trades. -

Cisco rebounds and plenty of love for this stock as a fairly upbeat meeting Wednesday saw shares pop to close over $16.00 a share. Morningstar has had a long-time crush on this stock, giving it 5 stars and a $26 target. Barrons.com shares the feeling giving the stock a $25 price tag.

Pop Quiz – ‘ Name the CEO of PepsiCo.’  (get it- Pop?  Quiz?) She’s Indra Nooyi and recently shook up management for losing share to rival Coke. Wall Street has beaten the stock down and criticized management for paying more attention to PepsiCo’s snack biz than it’s beverage biz. Share price is 5.6% lower since she took over in 2006 while Coke has soared in the same period 56%. Pepsi is #3 in the USA behind Coke and Diet Coke. PEP has a 5 star rating from Morningstar and a current dividend yield of 3.5% with a fair value estimate of $76 a share.

China agrees to help Europe for a Price: The New York Times reported that China wants, in exchange for its largesse, to be renamed a market economy. The labeling is important because than China can dump goods and services at bargain prices and not be accused of doing so. It’s cash now- your economy later.  Ah, Ming, now I know why they call you Merciless.

Low Bond Yields are not good for savers but Great for companies that are refinancing their debt. No secret that the Fed plans on keeping rates low for the next two years and gives us all an opportunity of looking long (Go deep!) Hewlett Packard, Intel and others are borrowing and refinancing  at low long term rates whether they need to or not, according to recent Barrons.com article. Investors may well be served to begin looking for longer term fixed products to increase yield.

R word has been spoken. WSJ survey showed that economists now fear there is a one in three chance at the U.S. slipping into a recession. (Any betting man/woman will take the other side of that in a heartbeat.)

The Donald backs gold instead of dollars and just accepted $176,000 as a security deposit at 40 Wall Street from a precious metals dealer. Now that The Donald has accepted metal rather than cash Brett Arends thinks this may be signaling an end to the gold boom – for a while. The other reasons Brett shares are: Gold mining stocks haven’t caught up with bullion; Current price is waaay expensive relative to inflation; Wall Street is warming up to it; Options traders are also optimistic and finally a close proxy to gold is clearly overvalued sayeth Brett. He points out that TIP prices are silly and overpriced with the long-term yield barely 1% over inflation. ( all bets off if Greece defaults…you, betchum)

Steve Jobs gone and Apple stock $400!

Lose 33% of OPM and still Bullish… John Paulson, billionaire and hedge fund manager, in an interview with WSJ. In explaining his dismal performance Paulson said, ‘In retrospective, we were too confident in expecting the economy to rebound this year.’ But, he said, he expected his firm to be now poised to outperform. PS- OPM is Other People’s Money.

The Future is in Streaming…Netflix stock at $155 and as recently as July $299. Obviously the company’s core strengths don’t work well in a world where streaming is where the customer is and wants.  Can you say stock goes lower?

Going, going, going…Wrong! Since the time I was in short pants I was told that sooner or later the world was going to end up with no more oil. I was also told that the world had better wake up and smell the coffee and start working on a perpetual motion machine or something that operated on tomato juice because eventually The Middle East would be one big beach with nothing except big derricks pumping sand out of the ground. A big whoops!

According to Sunday’s WSJ the total amount of oil pumped out of the ground has been 1 trillion barrels with an estimated 1.5 trillion still available. This doesn’t mean that the cost of oil will be a lot cheaper- but new technology allows us to bring the oil to the surface. Plus, we’ll be using it a lot faster since other countries are quickly upgrading their standard of living. For right now the gasoline buggy should work just fine for the immediate and, maybe, long-term future.

Seven States align against AT&T deal to buy T-Mobile. Sprint still not finding investor interest. That’s the game and trade, dear trader. 

Stock downgrades –  Research in Motion by Raymond James, NetFlix by Caris & Company and MasterCard by Robert W. Baird.

71 banks closed so far in 2011. Sometimes we forget.

Finally- happy news as Jennifer Granholm announces that she would never again seek elective office.

Questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.