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Posts Tagged ‘bail-out’

I could write volumes on what happened last week.  I am just going to stick to the most recent news which is the almost 1 trillion dollar bail-out of Greece and everything that ails Europe.  No worries – After last week’s market decline, we wake up to find that the Europe Central Bank is delivering an almost 1 trillion dollar bail-out to solve the problem.  In other words, they are going to fix the debt crisis by issuing more debt.  It gets even better.  The Federal Reserve is also assisting in that bail-out package. 

Taking these enormous steps to save the system just goes to show how close to the brink the euro might have been last week.  Does it solve the problem?  Does the market just go up from here?  

There are several points to consider.

The Europe Central Bank is not the Federal Reserve – The United States can pull something like this off.  It is very suspect that the ECB has the ability to pull the same “solution” or push the problem off into the future without a hitch.  Just like the US, they have no room for mistake and the EU is in an environment where mistakes can easily happen.

The US Government made their big bailout attempts in 2008 first on September 19th and then the TARP on October 3rd.  Following those heroic methods to save the system, over the next 6 months the stock market dropped -40%.  Initially after the bailouts started, we saw the same type of positive stock market action as we are seeing on Monday.  However, it gave way to further large declines.

There are still a lot of European politics to get around.  Politics, the euro, and cultures are vastly different than here in the US.  This solution is not a done deal.  In addition, Greece and some other parts of Europe will still have to deal with the social and civic unrest and backlash. 

If this gets pulled off, we are maxed out as a world economy when it comes to creating more debt to handle current debt problems and pushing current crisis out into the future.  Thus there is no room for any other problems while walking this financial tightrope.  Utilizing the vast majority of the IMF (international monetary fund) to bail-out Europe (of which the US funds 18%) is the last resort.  There are many more countries that could potentially need help.  Further, if this thing doesn’t work (and I believe the odds are that it will not work) look out below.  Debt might end up being Europe’s kryptonite and Superman might not save the day.

Don’t be fooled into believing that the problem in Europe is fixed.  This is an area on the globe that is walking a tightrope.   This is a much bigger problem with many moving parts that connects all of us.

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The problems overseas aren’t settling with the markets very well and for good reason.  You have the developing problem in Europe with the first of many debt plagued countries on the brink of defaulting on their debt.  Greece is begging for a bail-out.  The EU tells Greece not so fast.  If you want help with your debt in the form of a guarantee by the EU, then some tough choices are going to need to be made.  Greece will actually be forced to cut spending and oh no…make wise financial decisions.  Oh the horror…

The day of the US style easy money bail-outs are over.  Now, bail-outs come with tough terms and conditions.  Shouldn’t it be that way?  Would the US be in a much better place if our creditors would have told us that the US can borrow money as long as changes were made?  The problem is that we are borrowing the majority of our money from ourselves.  So, that would mean we would be forced to actually be wise and make prudent fiscally responsible decisions on our own.  As long as there are politicians in Washington, that will not happen.

John Mauldin points out that there is no good solution for Greece.  The terms and conditions of a bail-out are going to be as tough as the cons of defaulting on debt.  The following is from his latest frontlinethoughts newsletter. This is one of the most excellent resources for investors and is free.  Everyone should be signed up for this newsletter. 

While German Chancellor Merkel has indicated a willingness to help, the German finance minister and other politicians are suggesting German cooperation will either not be forthcoming or only be there at a very high price; and the price is a severe round of “austerity measures,” otherwise known as budget cuts. Greece is being told that it must cut its budget to an 8.7% deficit this year and down to 3% within three years.

Now, here is where it actually gets worse. If Greece bites the bullet and makes the budget cuts, that means that nominal GDP will decline by (at least) 4-5% over the next 3 years. And tax revenues will also decline, even with tax increases, meaning that it will take even further cuts, over and above the ones contemplated to get to that magic 3% fiscal deficit to GDP that is required by the Maastricht Treaty. Anyone care to vote for depression?

And add into the equation that borrowing another E100 billion (at a minimum) over the next few years, while in the midst of that recession, will only add to the already huge debt and interest costs. It all amounts to what my friend Marshall Auerback calls a “national suicide pact.”

The problem is that this is just the problem with Greece.  There are many other countries that are going down the same path.  It is much like the domino problem that we had with the banks and financial institutions in 2008. 

Then there is Dubai.  Dubai created a shock across the markets when it was disclosed in December that they were on the verge of default on their debt.   Well, apparently Dubai has not done anything to solve this problem.  CNBC reported today that “Dubai World will offer creditors either 60 percent repayment over seven years and a government guarantee, or full repayment with a debt for equity swap for property assets of Nakheel and no guarantee.”

Those aren’t good solutions.  The issues that we still deal with in an ongoing financial problem in our own country are seemingly contained in the fact that everyone is getting use to the new normal.  However, the sovereign debt (debt from other countries) crisis is a whole other deal and new dynamic for the markets.  We could be seeing the start of financial crisis round 2.

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Every Friday, all across the country, bankers hold their breath.  This is the day that the FDIC chooses to show up and take over banks that are on the verge of failure.  This past Friday, FDIC employees were especially busy when they showed up at 9 different banks.   The banks had combined assets of 19.4 billion dollars. 

On Sunday one of the largest bankruptcies in corporate history occurred.  CIT who lends money to hundreds of thousands small to medium business filed for bankruptcy protection.  This could have some pretty large ripple effects.

The problem is the lack of capital to those lenders and banks who focus on the small business owner.  The Obama and Bush Administrations failed miserably in taking care of  the heartbeat of America, the small business owner.   Take that capital they are dealing out like candy and give it to those banks that service the small business owner.  Further, if you want to solve the unemployment problem in this country, help the small and medium sized businesses.  Of course, that would be the promotion of capitalism which is something none of the politicians seem to understand.

The Obama Administration stated that they might infuse money to small banks if they will agree to lend to small businesses.  The Obama Administration needs to get a backbone.  If they are going to give money to the big banks,  put stipulations on the money and stop requesting what they want the banks to do in return of receiving the bail-out money.  They are dealing all of this money out to the big banks and at the same time wanting these big banks to stop abusing credit card customers and start lending it.   Here is an idea – STOP GIVING MONEY WITHOUT STIPULATIONS!!  Go ahead and give money to the small banks without stipulations and they still will not lend it out.  It is all about survival.

You got to love bank nationalization and the march to socialism.

Levels to Watch

Let’s take a look at the price levels on the S&P 500 because some damage was done last week.   We have broken through some pretty significant price levels.  However, the BIG ones are in front of us.  The range to watch on the S&P 500 is 989 to 918.  It will be interesting to see what happens around those levels.  Yes, this is a wide range.  However, it does give you a good range in which to monitor risk if you are heavily invested in stocks.   Remember, the question is always,  “Is the rise in the stock market from March a new bull market or just a bear market rally?”  The answer to that question is crucial to the future of your invested money.

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Have you heard of CIT Group?  CIT is a company that lends money to about 1 million small and medium size businesses and has about 40 billion dollars in debt. They are a pretty big player in the lending business, a company mired in debt, a company on the verge of collapse. 

In the event they fail, there could be some pretty significant repercussions throughout the financial system.  Of course, they are not on the same scale as the Lehman Brothers. However, with a financial system on shaky ground, who knows what would result in the collapse of a large lender.  So, a company in trouble should be no big deal.  After all, President Obama is in the bail-out business and hasn’t had a good bail-out in a while now. 

No, not this time.  Poor little CIT doesn’t meet the too big to fail test.  President Obama stated that it had set “high standards” for granting aid to companies and leaving private investors as the one alternative to avoid collapse.  Wait a minute, excuse me while I settle down from that good laugh I had while writing. 

Since when does this administration have standards?  They still think that GM is a good business model.  So will CIT go into bankruptcy if Big Brother doesn’t lend them a hand?  Of course not, because Big Brother is going to lend them a hand.  The secret is that they are going to do it behind closed doors.  Yes, this is what is happening to our taxpayer dollars.  Roughly 7 of their big bondholders are in talks to cough up 3 billion or so to place another band-aid on the festering wound. 

Where do you think that these bondholders get their money?  With the banking system pretty much nationalized, the money easily funnels from the Government through these banks to these troubled companies.  Obama can keep his “high standards” and no problems to deal with in the financial sector.  They have been running the same system with AIG since that major entity was nationalized.

Price Levels

Let’s take a look at price levels. Last week I warned that things were looking bleak for the market.  As soon as I wrote the warning and hit send, the market turned around and put in a big week.  So does that mean we are out of the woods in the near-term?  Well, last week was the one week out of the month that we have options expiration.  Options expiration can be a real dramatic week either positively or negatively.  It is misleading to see the results of options expiration as what is really occurring with the market.

The next significant price level we are looking at is 956.  The S&P 500 has entered into a price level “zone” (over 940) and now we will really see what this market is made of.  Any strength carrying the S&P 500 over 956 could indicate that we are heading towards 1000.

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