Tag Archives: Euro
Looking ahead September 12th could be pivotal day for two reasons
Posted on 09. Sep, 2012 by Harvey Sax.
One thing we talk about in our Investment Survival Workshops is learning to develop a horizon further out than tomorrow. I know that sounds obvious but it’s harder to do than you think. Most people including myself, hesitate for a moment to recall what they did yesterday and most of us wake up and think about what we are going to do that day, not the next day or the following week. When I moved from Eastern Standard time to Mountain Standard time zone, I dreaded getting up two hours earlier in the predawn to read the papers and analyst reports. I soon came to the conclusion, though, that if you are worrying about what’s going to happen today, you’re too late already- no matter how early you get up. What’s going to happen today has for the most part been determined in Europe already or prior to that in the Asian markets. No, you need to be worrying about what’s going to happen tomorrow or the following Thursday or some time in the future. With that in mind, I’m worrying about what’s going to happen Wednesday.
1. Apple launch of the new iPhone. Apple will have to hit the ball out of the court . That’s something they have not done since Jobs died. Sales are good and the products shine compared to the competition with one big exception. The hardware, feel, and sex appeal of the new Samsung Galaxy III are greatly superior to the dated series of iPhones now. In fact if Apple doesn’t top it, Galaxy III may be my next smartphone. Apple now represents 5% of the S&p 500 by weighting. It can drag down the index and crush the NASDAQ.
2. Germany’s constitutional court is due to rule on Sept. 12 on whether the euro zone can launch its permanent bailout fund. It will be very bad for the market if they turn this down. This is a real distinct possibility considering that the German press has been slamming Merkel about the recent ECB decision to support Eurozone member bonds in the aftermarket.
The market is deeply overbought to begin with so I think traders should be leery come Tuesday. Wednesday might be a pivotal day. Longer term investors of course won’t be bothered with this noise. They don’t mind watching their portfolios decline 5%. Unfortunately fewer and fewer of those investor are left playing.
Interesting interview with Ken Rogoff, the author of “This time it’s different”
Posted on 02. Jul, 2012 by Harvey Sax.
If it’s 2008 redux, there is one big difference. It’s Summer not Fall.
Posted on 12. Jun, 2012 by Harvey Sax.
Everyone is nervous about Europe. Me too. I have no way of knowing how much of this is already priced in the market. You’d have to say a lot based on the violent reaction in the oil patch, some European markets but I don’t see any positive outcome from this weekend vote in Greece. If they vote to keep the austerity demands in place, brief rally and the market will soon say the economy is just going to at best muddle along and at worse, be right back at the bread line. On the other hand if they abandon austerity, there is likely to be some kind of Euro shock although it could be brief followed by a very sharp rally if Germany agrees to tighter fiscal ties. From what I can gather the Germans are done with the Greeks and might be willing to be more cooperative with the ECB if they’re gone. A lot of what ifs and no way for me to have any edge. If it’s 2008 redux, there is one big difference. It’s Summer not Fall.
Euro like a bad marriage that’s too expensive to leave
Posted on 05. Jun, 2012 by Harvey Sax.
I’ve been struggling with a metaphor to describe the state of affairs in Europe. I’ve got it now. It’s a bad marriage . All parties now realize they’d be better off ending it except they can’t afford the divorce. At some point, my guess is that Germany answers the question, “Why are euro divorces so expensive? Because they’re worth it.” or do they just learn to live together and make the best of it. I don’t know the German psyche well enough to answer that one. Perhaps one of our readers will hazard a guess?
Soros says Europe has three months to avoid catastrophe
Posted on 03. Jun, 2012 by Harvey Sax.
I don’t pretend to know what’s going to happen but I’ve said many times, the world would be much better off without the euro. For reasons beyond my comprehension, the Europeans seem hell bent on keeping it. Perhaps this speech from George Soros will make it clearer to you.
Remarks at the Festival of Economics, Trento Italy June 2nd
Japan Is Never Going To Default, And The Kyle Bass Trade Will Be A Disaster – Business Insider
Posted on 03. Jun, 2012 by Harvey Sax.
Kyle Bass’s Most Famous Trade Is A Disaster, And It Is Never Going To Work Out Joe Weisenthal | May 20, 2012, 6:42 AM | 23,775 |
Kyle Bass was one of the handful of hedge funders who made a fortune betting against housing during the subprime bust, and since then hes been stalking his next big “career trade.”For years now, his big target has been Japan, a country with a debt-to-GDP ratio of over 200% and a shrinking/aging population. Hes convinced that its only a matter of time before the country implodes in a massive sovereign debt crisis that sends bond yields soaring, while the yen becomes worth less than confetti.
via Japan Is Never Going To Default, And The Kyle Bass Trade Will Be A Disaster – Business Insider.
I thought this was interesting since Bass has legions of fans. It’s not so much that the trade is wrong as that what he advocated owning are puts on the JGB and their is a finite life to them. He called it an asymmetrical trade where you could make 100 times your money or potentially lose all of it. If this article is correct, it looks likely investors will lose all of it.
Spain’s Banking Rescue Should Become Example for Europe – Bloomberg
Posted on 31. May, 2012 by Harvey Sax.
Spain’s Banking Rescue Should Become Example for Europe
Europe’s leaders can’t save their currency union without figuring out a way to salvage the region’s banks. Spain is a perfect place to start.Perhaps no country better illustrates the mutually reinforcing links among the euro area’s banking, sovereign-debt and economic crises than Spain. Its banks are largely paralyzed amid concerns about heavy losses on real estate loans that, by various estimates, could require as much as 120 billion euros $150 billion in fresh capital to offset. Tight bank credit has in turn deepened the country’s economic slump, increasing banks’ potential losses and fueling fears that bailout costs will overwhelm the Spanish government’s already stretched finances. The longer the situation lasts, the worse it gets: Nervous investors pushed Spain’s 10-year borrowing rate as high as 6.7 percent Wednesday, up from less than 5 percent in early March.
via Spain’s Banking Rescue Should Become Example for Europe – Bloomberg.
Who Lost the Euro? – Businessweek
Posted on 24. May, 2012 by Harvey Sax.
Opening Remarks
Who Lost the Euro?
By Clive Crook on May 24, 2012 Tweet Facebook LinkedIn Google Plus 19 Comments
The arc of Europe’s postwar history is turning toward tragedy. It isn’t just that much of the Continent has fallen into a new Great Depression, or that in some countries things will get worse before they get better. It isn’t even that the whole mess was avoidable in the first place. It’s that the crisis is dividing Europe along the very lines the European project was intended to erase.
Decades of clichés about European “solidarity” and “the European idea” are being held up to ridicule. The notion that Greeks, Spaniards, Britons, Germans, and Italians are instinctive partners whose commonalities transcend their cultural differences and historical enmities—that “Europe” is a real community, not just a heavily worked-over blueprint in Brussels—turns out to be, let’s say, disputable. Ancient stereotypes are as livid as ever, framing conversations about the crisis right across the European Union. Germans are bossy and severe. Italians are idle. Greeks are corrupt. Brits are arrogant. The French are vain. So much for 60 years of European unification.
European Banks Unprepared for Greek Exit From Euro – Yahoo! Finance
Posted on 23. May, 2012 by Harvey Sax.
European Banks Unprepared for Greek Exit From EuroBy Elena Logutenkova, Liam Vaughan and Gavin Finch | Bloomberg – 1 hour 27 minutes ago
Europe’s banks, sitting on $1.19
trillion of debt to Spain, Portugal, Italy and Ireland, are
facing a wave of losses if Greece abandons the euro.
While lenders have increased capital buffers, written down
Greek bonds and used central-bank loans to help refinance units
in southern Europe, they remain vulnerable to the contagion that
might follow a withdrawal, investors say. Even with more than
two years of preparation, banks still are at risk of deposit
flight and rising defaults in other indebted euro nations.
via European Banks Unprepared for Greek Exit From Euro – Yahoo! Finance.
Greece A Result Of A Greedy Goldman? Nahhhh…
Posted on 06. Mar, 2012 by Wilensky.
Back in 2001, Greece had a problem. The struggling country’s debt levels were simply too high to qualify for admittance to the European Union. While these regulations were in place to protect the structure of the European economy, Goldman Sachs was more than willing to step in with a timely loan which provided the necessary liquidity to hide the nation’s accumulated debt load. Essentially a perfect solution for both Greece and Goldman, here is the situation illustrated by Bloomberg:
“The Goldman Sachs transaction swapped debt issued by Greece in dollars and yen for euros using an historical exchange rate, a mechanism that implied a reduction in debt, Sardelis said. It also used an off-market interest-rate swap to repay the loan. Those swaps allow counterparties to exchange two forms of interest payment, such as fixed or floating rates, referenced to a notional amount of debt.
The trading costs on the swap rose because the deal had a notional value of more than 15 billion euros, more than the amount of the loan itself, said a former Greek official with knowledge of the transaction who asked not to be identified because the pricing was private. The size and complexity of the deal meant that Goldman Sachs charged proportionately higher trading fees than for deals of a more standard size and structure, he said.”
Now any seasoned investor knows that when something is too complex to fully understand, chances are you should walk away. And when the other side of the trade demands that you accept the terms without shopping the price around, you definitely walk away. However, the hands of Greece’s Debt Chief were tied by Goldman’s conditions:
“Sardelis couldn’t actually do what every debt manager should do when offered something, which is go to the market to check the price,” said Papanicolaou, who retired in 2010. “He didn’t do that because he was told by Goldman that if he did that, the deal is off.”
Again, this should have been another indicator that Greece was heading into dark waters. Yet greed overcame caution and both parties came to an agreement with a complex structure that exchanged Greek issued debt (in dollars and yen) for euros. Using and off-market interest rate swap to repay the principal, this exchange suggested that the overall load would be reduced. However, “those swaps allow counterparties to exchange two forms of interest payment, such as fixed or floating rates, referenced to a notional amount of debt.” As a result, the trading costs of the deal skyrocketed to more than the total value of the loan itself, allowing Goldman to increasingly charge higher trading fees as the value rose.
If you have a hard time following the intricacies of the loan, that’s the point. It took Greece’s Debt Chief over three months to realize the terms of the loan weren’t nearly as attractive as first believed. How could this happen on such a large scale you ask? Derivatives expert Satyajit Das has a simple explanation, “Like the municipalities, Greece is just another example of a poorly governed client that got taken apart… These trades are structured not to be unwound, and Goldman is ruthless about ensuring that its interests aren’t compromised — it’s part of the DNA of that organization.”
A “sexy story between two sinners” indeed.
Paulson Calling For A Greek Default
Posted on 15. Feb, 2012 by Wilensky.
According to Paulson & Co., a hard default by Greece could spell economic disaster of unprecedented proportion along with the breakup of the Euro. In his 2011 recap letter to clients, he estimates $117 billion will be needed to recapitalize banks and satisfy other monetary needs.
Paulson & Co.:
“We believe a Greek payment default could be a greater shock to the system than Lehman’s failure, immediately causing global economies to contract and markets to decline,” the hedge fund said in the letter, a copy of which was obtained by Bloomberg News. The euro is “structurally flawed and will likely eventually unravel… …It seems likely that the pressure to keep the euro together becomes too great and it ultimately falls apart.”
While the firm identified the largest threat as being the overexposure of European banks who simply lack the equity to handle a crisis, they’ve had rough luck predicting the financial sector in the not-so-distant past. 2011 halved the fund’s assets, primarily due to a large stake in Bank of America and the fund sold out of their position sometime last quarter. BAC has rallied close to 50% since.
via John Paulson Says Greece May Default, Spurring Euro Breakup – BusinessWeek.
Six Reasons to Avoid Japan In 2012
Posted on 13. Jan, 2012 by Ron Rowland.
Guest post: Ron Rowland
One of the best ways to make money in ETFs is to not lose money. I know it sounds obvious, but I can assure you that many people don’t get this key point. So if I can help you do that, then I count it as a success. And today I’ll talk about an ETF category I think you should avoid in 2012: Japan.
What’s Wrong with Japan?
I’ve been to Japan many times. I love the country and the people. Yet I have to tell you that now is not the time to invest in Japanese stock ETFs. Yes, I know the Nikkei Dow looks oversold, but it’s looked that way for years. As I’ve explained before, calling a bottom is tough. And I don’t think Japan is there yet. Here are six reasons why:
#1 — Strong Yen
The yen was very strong in 2011 … which is bad news because it makes Japan’s exports relatively more expensive. And exports are a BIG part of the national economy for Japan.
The authorities are well aware of this, of course, but there isn’t much they can do about it. The Bank of Japan intervened multiple times last year. In every case, the impact of their actions was gone within a few days.
#2 — European Recession
A huge chunk of Japanese exports go to Europe. As you’ve surely noticed, the euro zone is having a few problems. A severe recession — or at best a few years of low growth — seem likely for 2012 and beyond.
If Europeans have no money to spend, their demand for imports (from Japan and elsewhere) is going to plummet. This is another bad sign for Japan.
#3 — Hungry Competitors
Japan reached economic success by beating the developed countries in cheap, efficient manufacturing. Now they have competitors: Taiwan, South Korea, Brazil, India … and of course China.
The challenge for Japan is that all these other countries can do the very same things that put Japan on the map. And in some cases, they can do it better. Nations like Brazil have other advantages, too, like better access to natural resources and geographical proximity to key markets.
#4 — Aging Population
Japan is, on average, one of the oldest nations on the planet. Furthermore, the relatively small number of young adults has a very low birth rate.
The resulting imbalance is making it harder and harder for Japanese industry to keep growing. Older workers hang on to their jobs for dear life while younger people have no way to gain skills. We’re seeing a similar pattern here in the U.S., but in Japan it’s a much bigger problem.
#5 — Massive Government Debt
Japan’s national debt is projected to surpass 1 quadrillion yen in 2012. A big cause is the population imbalance noted above. All those older people require heavy spending on health care and pensions.
To stay afloat, Japan will almost certainly need to raise taxes on both individuals and businesses. And higher taxes won’t make it any easier to create economic growth.
#6 — Political Instability
Japan’s parliamentary government used to work pretty well. Now it’s turning almost as dysfunctional as Italy and Greece.
Consider this: Japan has had six different prime ministers since 2006. The current occupant, Yoshihiko Noda, took office in September 2011 and is already under fire.
The real problem isn’t the government; it’s the voters and their unrealistic expectations. Changing leadership is just a symptom.
via Six Reasons to Avoid Japan In 2012 | Invest With An Edge.
ECB Won’t Step Up Bond Purchases: Draghi – Bloomberg
Posted on 19. Dec, 2011 by Harvey Sax.
This is really pretty incredible. It’s surprising to me that more people are not talking about this. While the headline reads all doom and gloom, if you read the article, the ECB just provided unlimited loans to banks and without question many of these if not all will be buyers of their country’s soverign debt. This is the defacto unlmiited support peple are calling for. I guess they may have to spell it out better.
The ECB is resisting pressure to increase its bond buying, saying governments need to find a lasting solution to the debt crisis. The central bank has instead focused on helping the banking sector and will this week offer financial institutions in the 17-nation euro area unlimited three-year loans. Draghi said it’s up to banks to decide what to do with the money.
“One of the things that they may do is to buy sovereign bonds,” he said. “But it is just one. And it is obviously not at all an equivalent to the ECB stepping-up bond buying. One aspiration is to have them financing the real economy, especially small- and medium-sized enterprises.”
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