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Monday, May 20, 2024

Flashback Friday – EU and the Ghost of Lehman’s Past

It was September 15th, 2008 when Lehman announced they would file Chapter 11.

Lehman had already lost half their value in one day on September 9th as the government failed to step in and assist them.  Whether they were solvent or not became a non-issue as investors lost confidence and put a run on Lehman, making the short attacks on them a self-fulfilling prophecy.  Jean Claude Trichet yesterday, was speaking up for the EU in the same way that Dick Fuld attempted to speak up for Lehman as the end was near.  Fuld could not believe that people were questioning the solvency of LEH and Trichet can’t believe that people are now questioning even the continued existence of the Euro.

"Trichet did not convince me,” said Stuart Thomson, who helps manage $100 billion at Ignis Asset Management in Glasgow, Scotland. “Where does he think the Greek, Spanish and Portuguese economies will be three years from now? Their austerity measures will weigh on the euro area as a whole.”  As Greece tries to control a record deficit and stem a slide in its bonds, Trichet said the economy of the 16-nation euro area is solid and its budget shortfall will probably be smaller than those of the U.S. and Japan this year. The comments yesterday didn’t stop Spanish and Portuguese stocks from dropping on concern they are in a similar predicament to Greece, or the euro from tumbling to a nine-month low against the dollar. 

Trichet has been forced to fend off questions about the survival of the euro as investors doubt Greece’s ability to cut its deficit from 12.7 percent of gross domestic product to below the European Union’s 3 percent limit. As concern spreads to Spain and Portugal’s rising debt burdens, Trichet will try to stress the need for fiscal prudence without inflaming skepticism that it can be achieved.  “Something has to happen to turn credibility around,” said Paul Mortimer-Lee, head of Market Economics at BNP Paribas in London. “The market’s just saying it’s not believable. It might have to get worse before it gets better.”

Trichet said the “solidity” of the euro area “is not necessarily very well known” and its situation compares “very flatteringly with a number of other industrialized countries.”  He said that according to the International Monetary Fund, in 2010 the average deficit for the entire euro region should be around 6 percent of GDP.  “Can I mention what it is for other major industrialized countries,” Trichet said. “The U.S., a little bit more than 10 percent, Japan, a little more than 10 percent, and you can find out other industrialized countries that are even higher than 10 percent.”

We were discussing these comparisons in the morning post and in Member Chat yesterday and I pointed out that the STUPID countries are, for the most part, better off than the USA, as evidenced by this scatter chart of fiscal irresponsiblility:

So Trichet is not wrong when he says "sure we’re a disaster but look at America and Japan" but, much like Lehman saying they weren’t Bear Stearns – better than nothing can still be nothing to panicking investors.  And panicked they are as benchmark gauges of corporate credit risk in North America and Europe jumped to the highest in about nine weeks on growing concerns that governments will fail to close budget gaps sparked a global drop in stocks and bonds.  REALLY?  Is this actually news to someone?  Is it possible that THAT many people have not been reading our PSW Report?  Have I mentioned I like TBT lately? 

Countries (like the banks were) are overextended.  Last year’s crisis forced them to borrow much more than they wanted to but, if they are given time, they will return to normality.  Just like had we given the banks time, they would have collected 30 years worth of mortgage payments and even a 10% default rate would have washed out over time as banks generally collect 250% of a home’s value over 30 years (yes, mortgages are for suckers, but that’s a different article).  CDS’s jumped 12% in Western Europe yesterday and now the dominos are striking the IBanks again as Credit swaps on Goldman Sachs Group Inc. climbed 15 basis points to 131 basis points, according to CMA.  Contracts on Morgan Stanley jumped 18 basis points to 147, Citigroup swaps rose 23 basis points to 220 and Bank of America Corp increased 23 to 130.  Swaps on JPMorgan gained 17 basis points to 84.  Maybe NOW Government Sachs will start caring?

Asia is freaking out (down 3% this morning), Europe is freaking out (down 2% this morning) and we added some more disaster hedges yesterday but today WE ARE BUYING!  That’s right suckers, sell us your stocks – we are catching those knives.  I finished the 3rd section of our Buy List yesterday and our 45 trade ideas have held up exceptionally well since we began this last round on Jan 9th, when the Dow was at 10,618.  How is that possible?  Selecting stocks with good fundamentals and hedging your entries allows you to ride out these little market dips and we see this little correction as an opportunity to go long with our disaster hedges covering us – just in case we get another leg down.

Back on Jan 9th, I predicted we would be setting up for a down leg, saying: "It’s all about holding that 10,000 line on the Dow now, there is no more room for error to the downside of the markets or we may be seeing 8,650, not 9,650 again."  So here we are, at Dow 10,000 and it is time for us to intiate some long positions.  As I often say to members: "If we don’t buy low, how are we going to sell high?"  THIS is low.  It may not be THE low, but it certainly is A low and if we buy solid stocks that we believe in long-term, then this is an opportunity that cannot be passed up

China is a questionable investment, Japan is a questionable investment, Europe is a mess, the dollar is rising and commodities are falling.  US equities are not looking so bad are they?  I’ve been looking for consolidation around 10,200 and rotation out of the commodity pushers since November and now that we are getting it this is no time to sit on the sidelines moaning about the markets is it?   We’ve been buying on the dips since last week but this (Dow 10,058) was our 5% rule line in the sand since October so how about we give it a fighting chance?  I published our watch levels for Members last night and we’re not going crazy today but hopefully next week we firm up here and we can begin to BUYBUYBUY again.  To be clear, our oder of entry is:  Disaster Hedges first, THEN well-hedged upside stock plays.

Much like the financial crisis, this STUPID crisis is based on something that we knew was going to happen long in advance and, like all crises – this too shall pass.  Speaking of passing – we are passing the most feared event of the week as Non-Farm payrolls showed a 1.2M revision to the prior year (worse, of course) as the birth/death adjustment kicks in.  That means we’ve now lost 8.4M jobs (officially) since the end of 2007.  The BLS shows us 14.8M people are actually unemployed and that is now "only" 9.7% of the labor force thanks to 1.1M "discouraged" workers, who no longer count as unemployed.  If we can only get those other 14.8M people to stop looking for work, we’d be back to full employment!  See, we don’t have an unemployment problem, we have a problem with people who don’t know when to quit!  

Average hourly earnings were up a nickel in January, to $18.89 and I’m sure that went a long way towards covering the 8% increase in gas prices.  Of course, that’s nothing compared to the 6.4% increase in health care costs as our "World class" health-care scam is costing US citizens $282 Million PER HOUR.  That’s right, every hour of every day just take $1 out of your pocket for each family member and THAT’s how much this country is now spending on health care.  $2.47 TRILLION dollars in 2009, 17.3% of our entire GDP and that’s including $2.47Tn of health care.  Our non-health care GDP is only $11Tn so – AFTER we are done doing everything else we do in this country, we have to put in another 22% effort just to pay for health care.

That, my friends is DOUBLE the amount of any other nation on Earth and, considering we have the largest GDP on Earth you would think we would get some kind of discount but, quite the opposite, we get shafted and play the role of this planet’s biggest suckers as "THEY" scam a good portion of our population into voting NOT to change things.  How long can we sustain 6.5% increases in health care.  In just 8 years that will make health care 1/3 of our GDP – maybe when it’s half it will be considered to be a problem?

Oh well, that’s politics (actually it’s not, it’s destroying the economy and robbing the proletariate and setting up an elitist system where the rich get to live while the poor die alone but they shift it to a political arguement so people can wrap it in a flag and call you a communist if you object to being ripped off) and we hate to talk about politics, don’t we.

Meanwhile, it’s time to go shopping, mostly window shopping this morning as we test the waters but those falling knives are looking very interesting this morning! 

Have a great weekend,

– Phil

 

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