September, Tuesday 27, 2011

DOW +146 = 11,190
SPX + 12 = 1,175
NAS + 30 = 2,546
10 YR YLD = 2.01%

OIL - .97 = 83.48
DEC GOLD + 57.70 = 1,652.50
DEC SILVER + 1.56 = 31.53

Go figure. I read an article from Mark  Hulbert on Market Watch. He basically says it doesn’t make sense that the markets go up or down 300 points any given day  because of what is happening in Greece. Last week, the Dow lost 738 points and all publicly traded stocks in the US lost about $865 Billion in market capitalization. Since the stock market high this past spring, US stocks have lost approximately $2.5 trillion in market cap, and the prime suspect is concern over Europe’s debt situation. He says Greece’s sovereign debt totals a mere $393 billion, and even if you add in Portugal and Spain, the total sovereign debt is only about $1.25 trillion.

He goes on to ask: “Why, then do so many investment commentators persist in telling the story that Europe’s debt situation is to blame?”

Hulbert is very clever to offer no explanation for what is happening in the stock market. Maybe there is no explanation. Maybe stocks go up and down in a totally random fashion; maybe there is an invisible hand. Maybe there are forces at work that I’m too dense to recognize.

Mindful of the irrefutable evidence that I am a simpleton, I will attempt to explain the relevance of Greece on the Global Markets.

Debt, including the sovereign debt of Greece is not held on banks books as a liability, but rather as an asset. That means that banks can issue fresh loans based upon the assets they hold. And because we have a fractional reserve system of banking, the banksters can easily leverage those assets by 10 times or more, perhaps much more.  But it is not just the leverage; it is how banking has become interconnected.

Most banks in Europe have only written off a small portion of the value of the Greek bonds they hold, about 20%, but the remainder is highly leveraged. When Greece defaults, you can expect the failure of several highly leveraged European banks. Leverage is great when prices are going up but leverage can work against you when prices go down. Didn’t we learn this lesson here in the US about 3 years ago? French banks are particularly vulnerable. Banks will stop lending to each other out of fear. That will lead to huge losses in the commercial paper market. US money market funds hold more than 40% of their assets in loans to Europe’s banks. Companies with exposure to European financial assets will be in trouble. US companies that depend heavily on the commercial paper market for funding will be in trouble. In addition, many US banks and trading firms hold credit default swaps on European banks – basically bets against failure. But if the Euro banks fail, the insurance will have to pay off, resulting in a further squeeze  on available capital. Then end result is that credit freezes and money stops moving – and when money stops moving, businesses fail and unemployment rises.

Back to Hulbert’s article – Why is everybody blaming Greece? Well, I’m not blaming the Greek people; today, Greece passed a very unpopular property tax; this will show that Greece is serious about taxing its citizens; the citizens are serious about protesting;

 but the simple fact is that we are nearing a tipping point and this time, the tipping point is originating in Greece.

This is Europe’s turn to have a Lehman Brothers version of a banking collapse. And this time we’re looking at dozens of very large European banks in several different countries, and each country has different issues and different ideas about how to solve the crisis.

Can they solve the crisis? Probably not. Can they kick the can down the road, past this Thursday’s bailout funding vote in the German Bundestat? Maybe. And so we occasionally have a big rally day on Wall Street on optimism about a bailout. Yippee-yi-yo , the Germans are going to be handing out free money; woohooo, the ECB is injecting liquidity; wowzer, the Super Duper Group of Five Central Banks is riding to the rescue. That’s called buy the rumor.

Is there any realistic way to solve the crisis without a Greek default and a European banking crisis? Maybe there will be a solution. I haven’t seen anything but stop-gap measures so far. Tomorrow, the Finnish government votes on new powers for the European Financial Stability Facility, the Eurozone bailout fund. Thursday, the German parliament votes to ratify the bailout fund. Ocotber 3^rd, Eurozone finance ministers meet in Luxembourg. October 11, the Slovak parliament votes on ratifying the bailout fund. Mid-October and Greece runs out of money unless there is a big bailout. It could all fall apart in the next week, or the next month, or the next quarter.

My guess is that we will see the bailout ratified and approved by all concerned. The only question is whether it will work. Then again, maybe not. the FT was breaking news that while the Troika was "bailing out" Greece in the past years, the country was spending itself into an  even greater oblivion. As a result, the terms of the July 21 Second Greek Bailout will most certainly need to be renegotiated, with banks having to take even greater write downs on the bond exchange, and with far more capital having to be injected into the country. The result is the France and the ECB are panicking because as we all know, any additional write downs will expose just how undercapitalized French banks already are.

So far the game plan seems to be straight out of Treasury Secretary Tim Geithner’s 2008 playbook, which called for protecting the debt holders and the banksters from losses in an effort to save the system, and dumping all the cost on the taxpayers. That’s one idea. The reality is that there is no coordinated policy. The whole idea of international coordination apparently means finding the worst possible idea and forcing it on everybody. Meanwhile – and this may come as a shocker – different countries in Europe have different needs and different interests. Some countries will be hurt more than others by default. Some countries would be a greater burden in a bailout. Some countries will benefit more than others if there are defaults. A reminder that defaults can be effective at eliminating the competition.

What could go wrong? I don’t know, but the prognosis isn’t good and whistling past the graveyard doesn’t improve the situation.

We are rapidly approaching the end of the quarter, which is typically when you might expect some window dressing.

RANDOM NOTES:

The Standard & Poor's/Case-Shiller index showed that housing prices rose from June to July in 17 of the 20 cities the index tracks but are still down from a year ago.. Detroit, Chicago and Minneapolis posted the biggest percentage gains. Prices fell in two cities among those hit hardest by the housing crisis - Las Vegas and Phoenix.

The Conference Board’s Consumer Confidence Index was at 45.4 in September. The number is slightly above the revised reading in August of 45.2, which was the lowest since April 2009. A reading of above 90 indicates the economy is on solid footing.

Dallas Federal Reserve Bank President Richard Fisher, one of three Fed officials who dissented against the central bank's September 21 decision to replace some of its short-term holdings with longer-term ones to push down borrowing costs, said his fundamental concern was that the program would not work.

"The monetary accommodation we have thus far implemented has failed to deliver," Fisher said. "There is significant risk that the policies recently undertaken by the FOMC are likely to prove ineffective and might well be working against job creation."

Researchers at the Swiss research university of St. Gallen did a study on stock traders and compared them with psychopaths. Survey says: stockbrokers’ behaviour is more reckless and manipulative than that of psychopaths. Researchers concluded that people with an impaired ability to experience emotions could actually make better financial decisions than other people under certain circumstances. The study suggests the participants' lack of emotional responsiveness actually gave them an advantage in investments. The emotionally impaired players were more willing to take gambles that had high payoffs because they lacked fear. 

Another new survey shows: Employers have been steadily shifting the cost of health insurance onto workers over the past decade. Half of workers at small firms with individual policies now face annual deductibles of $1,000 or more, compared with 16 percent of those workers in 2006. At large firms, the share has grown from 10 percent to nearly one-third. Premiums for family plans rose 9.5 percent in 2011 compared with 2010. Without any real national discussion or debate, there’s a quiet revolution going on in health insurance in this country. Health insurance is becoming less and less comprehensive. The average cost of a family policy climbed 9 percent in 2011 to $15,073.

Target is getting a head start on the biggest online shopping day of the year. The retailer sent out an email blast yesterday touting their online sale “Lucky you. These Cyber Monday deals couldn’t wait until November. Better Hurry.”

Seriously? Seriously? I propose a new tax. I’m not a big fan of taxes but I think we need a 99% tax on any company that has a Christmas Sale prior to the end of triple digit temperatures in Phoenix. I think that’s reasonable.

Hallmark has come out with a new line of cards – the Sorry you lost your Job – Sympathy Card. The card, when used in conjunction with $3.50 will buy you a gallon of gas.

30% of American women "view their work as a mission from God as compared to 20% of working men," while "42% state that they often or always pursue excellence in their work because of their faith in contrast to 31% of working men."