That's Going to Leave a Bruise

Everything was sailing fine. Central banks circling the wagons, governments saying some smarter things, I got my closet cleaned out - everything was simply dandy. Then that old fuddy duddy S&P had to come out this evening with a credit rating watch (like expect a downgrade for some soon) on several EU countries, including France and Germany (okay, France has been suspect for a while but Germany?, seriously). I suspect the strong market gains we have seen of late are going to be shaved back a tad. Nothing too terrible, but a shave nonetheless - at least for now. Long term, I do not see a tad, but I am not about to try to predict how long the powers that be in EU can keep this ship afloat. They already surpassed my expectations by at least a year. But the darn thing will sink in time.

http://www.bbc.co.uk/news/business-16042346

Good to be Prepared

Here is a nice piece on what some companies are doing to prepare for a possible collapse of the Euro, or at least certain contries perhaps leaving the EU. Good to plan, but as certain companies are finding, there is not a lot they can do. Some stuff yes, but not a lot.

http://www.reuters.com/article/2011/11/30/us-euro-zone-contingency-idUSTRE7AS0H020111130?feedType=RSS&feedName=topNews&rpc=71&google_editors_picks=true

Also worth noting is Standard & Poors downgrading of a bunch of big banks. They announced this was coming, so no surprise, but tell that to the downgraded banks.

http://www.reuters.com/article/2011/11/30/sp-ratings-idUSN1E7AS23C20111130

Housing prices also dipped in September, after months of small increases. Go figure:

http://www.latimes.com/business/realestate/la-fi-home-prices-20111130,0,3352737.story?track=rss&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+latimes%2Fmostviewed+%28L.A.+Times+-+Most+Viewed+Stories%29

But hey, all is well, the Victoria's Secret Fashion show is on tonight:

http://popwatch.ew.com/2011/11/29/victorias-secret-fashion-show-reasons-to-watch-the-best-special-of-the-season/

"A New Plan"

I am linking an article from MSNBC on why stocks are up dramatically today, but I simply have to quote here part of the first line:

"U.S. stocks jumped Monday as optimism grew that European leaders would come up with a new plan to resolve the region's debt crisis . . ."

http://bottomline.msnbc.msn.com/_news/2011/11/28/9073132-stocks-surge-amid-euro-zone-consumer-hopes

If you live in a cave, you may have missed the fact that EU has been under a good bit of financial stress for at least three years. Even I predicted in January 2009 (yes - nearly three years ago) that the EU might lose a few members, and at that time I specifically mentioned Greece, so the problems in the EU are no recent development and have been obvious for a very long time, even to me. And if you follow the press, European leaders have been flying all over the place to meet, falling over each other to throw out words of confidence and doing all that they can to right the ship. Indeed, those leaders unable or unwilling to tote the EU line are now or soon to be gone. None should ever dare put the vote of their own citizens in the line ahead of EU unity or financial interests. That would be blasphemy.

The point here being that European leaders do not have any new plan. They have no new thoughts, no new agenda, no ground breaking approach. They have nothing more for us than they did last week, last month or last year. Nor can they. There are no great or even good options for the EU. They have a list of options and the best they can do is try to pick the least painful, but due to the EU being made up with a bunch of independent countries with independent agendas and priorities, the odds of them ending up with the least painful alternatives are relatively low. A betting man might wager that the EU's fate will simply be whatever happens if they cannot agree on something else to happen, i.e. default. They cannot and will not get their collective act together, but who cares. At the end of the day a collective decision by the EU is not likely to lead to a much better outcome than a failure to act. Sovereign default in some form is in the cards for a number of members, elevated bond rates are in the cards for all members and holding the EU together (perhaps with a few less countries) is going to be probably the best they can muster out of this long term.

Let me put it this way. Any plan that calls for austerity to work and lead to a substantive reduction in debt at the PIIGS so that they can pay their debts and not default is a plan that will take over a decade to complete, if they are lucky. Seriously 2020 and beyond. Do you really think the citizens of Germany, France or the PIIGS are willing to suffer that long? Heck, I am tired of this as is everyone else following the action. Seriously EU, stick a fork in it, those PIIGS are done!

Now the other part of the article (which by the way everyone is pointing at, not just MSNBC) is that heavy Black Friday spending is spurring retail stocks. Yes baby, the consumers are back in the game! Let me hear ya' shout out!!

I know the logic here. Consumers buy stuff. Stores do well and become optimistic. Stores order more goods to fill shelves and build inventories. Manufacturers build more goods and hire people to build the goods. More people have jobs and an income and can afford to buy stuff. Repeat cycle and everything is honky dory. But let me repeat the cycle with a bit of (my sense of) reality:

Heavily indebted consumers with underwater homes buy stuff, thereby increasing their debt burden. Stores that slashed prices dramatically to draw in customers think they did well and become optimistic. Stores order more goods to fill shelves and build inventories in the hopes consumers keep up the buying. Manufacturers build goods overseas in cheap labor countries and hire people overseas to build the goods. More people overseas have jobs and an income and can afford to buy stuff overseas. Repeat cycle and everything is where we started except consumers have more debt and stores have more idle inventory.

You judge - am I a pessimist or realist?

EU Bonds

One solution that seemed to make sense a couple of months ago was the EU, as a union, issuing bonds, so that those with high rates - like Italy, Greece, Spain and the like - can finance with better rates by financing with those with low rates, like Germany. Well, it seems Germany is starting to run into a smidge of a ripple in rates. Nothing too serious just yet, but bond rates is a confidence business and the minute those buying the bonds get a bit spooked, the rates go up. All this means that the prospect of a EU unified bond sale is becoming more problematic. Obviously, there is still a quantum leap between German rates and say Italian rates, but is seems to me a common EU bond will price toward the negative, like Greece, Italy and Spain, and not toward the positive. The buyers are already getting a bit edgy about Germany and the fact that its banks are heavily exposed to EU sovereign debt.

China seems to be slowing too, which is no big surprise. With its biggest export markets sucking wind and a domestic real estate bubble, hard to believe anything else will happen.

Disclosures: None.

Take Your Medicine

Good things come to those who take their medicince up front and put the problem behind them as quickly as possible. Admittedly, Iceland's problems were so severe it had no other choice, but the fact it is already on the rebound is telling.

http://www.bloomberg.com/news/2011-11-23/iceland-s-outlook-revised-to-stable-by-s-p.html

Mama Needs a New Pair of Shoes!!

We have been waiting, and waiting, and waiting, and waiting for that other EU shoe to drop. Perhaps it is a stylish Italian leather shoe or a spicy Spanish one with big flaps and straps sticking out. Is a French stiletto soon to be in the mix? Ireland isn't known for its shoes and I am pretty sure the same can be said for Greece and Portugal. But somewhere out there is a major shoe about to drop and - pleeeeaaassseee - let go of that sucker already, cause Mama needs a new pair of shoes.

http://www.reuters.com/article/2011/11/21/eurozone-idUSL5E7ML3UK20111121

Pressure is mounting and the chess pieces keep moving but I have yet to hear anyone (who has no direct stake in the game) say that the EU can work this out without some major defaults. It is going to happen . . . I almost hear the wind around a falling shoe shaped object. Yes Spain and Italy - as in the too big to save category - are both seeing unsupportable financing rates on their bond sales. France is facing a possible credit downgrade. New leaders in Greece are not ready to announce good plans yet (like they have one) . . . and on and on.

This side of the pond, the "not so" supercommittee failed to make their recommended cuts - surprise, surprise, surprise!! Seriously, did anyone think that a committee split between Dems and the Dem nots would agree to over a trillion in cuts. Heck, they probably cannot agree on where to order lunch.

http://nbcpolitics.msnbc.msn.com/_news/2011/11/21/8934763-panel-fails-to-cut-deficit-12-trillion

Add in Hank Greenberg (die already) suing the U.S. government for $25 billion over a loser company the U.S. spent way, way too much saving and it really is a nice mess.

http://www.businessweek.com/news/2011-11-21/greenberg-s-starr-sues-u-s-for-25-billion-on-aig-bailout.html

Perhaps China is ready to swoop in and save the day - NOT. Japan is sucking wind and where do you think emerging economies will be when the EU and US are screwed. Yep, I am seeing roses coming up everywhere - especially in New Hampshire in late November.

Disclosures: None.

FAIL ALREADY!!

I for one am tired of all the blah, blah, blah about the EU failing, some of it of course from me as well. It is a story where everyone knows the ending and I am tired of hearing about it, tired of waiting for that magical moment when the cards fall down and, really, really, tired of all the false promises that a fix is in the cards. Shhhhhh... listen in closely . . . . and I will give you a deep, dark secret. Ready? THERE AIN'T NO FREAKIN' FIX.

The PIIGS are toast and everyone knows it. EU has been kicking the can hoping to save the banks, not the PIIGS, but even that is not working. Given the debt loads, they would need to kick the can for another decade just to get past the worst of it. Do you think the governments or voters in the EU countries are willing to wait this long? Are you ready to keep reading about this issue for another decade? I pause for a minute while you chew on this . . . . . . . . . . . . . . (imagine the background track from the last question in Jeopardy playing right now) . . . . . . . . . . (ding!). Your time is up. If you voted more can kicking, leave this blog now and never come back. And beware, natural selection is likely to catch up to you soon. If you voted, let the PIIGS default and deal with it (and the rest of the world deal with it of course), then you have my thanks.

Okay, it will be another major financial meltdown and it will impact all corners (like there are any on a globe) of the Earth, but better to deal with it now than lose a decade or two and then have everyone vociferating (you like it when I use big words) about how we should have pulled the plug earlier. Seriously, default is a bad word, but countries tend to get over it in time. And if your are one of many, you tend to fade to the background.

Sure some big banks in the EU and US and elsewhere will go under or need further government support (I support the former by the way) but there is plenty of capital sitting around on this globe in corporations to weather the storm. Wait another decade, I am not so sure.

So folks, I say pull the trigger, pop the bubble, yank the cord, pull the plug or whatever you catch-phrase seems to be, but let's do our best to let defaults happen, put it behind us, control the damage and move on. There simply is no better choice.

Okay, let me retract on that last statement. If the EU were to be a true union and all the countries joined together for common government financing and they agreed to print the hell out of the euro to devalue it, then maybe the EU could survive without massive defaults. But try to sell this idea to Germany.

Disclosures: None.