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The Only Way to Solve the European Sovereign Debt Crisis

It's often difficult to comprehend – much less internalize – the risks posed by the European sovereign debt crisis.

But understand this: If Europe's problems aren't resolved in an orderly fashion, the stock market drops we saw last month will be small potatoes compared to the steep declines that lie ahead.

So here's the solution: Let the Eurozone break up right now on its own terms. And let a new, stronger euro currency come as a result.

At this point, that is the only viable solution to the problems Europe faces.

So far, everything the European Union (EU) has done to try to subdue this outbreak has come up short. In spite of all the group's efforts, the European sovereign debt crisis continues to snowball, drawing more and more countries into the fold as it gathers momentum.

The trendy solution is to simply expel the weaker members of the Eurozone. That would work if Greece was the only problem, but it's not.

That's why a better solution would actually be the opposite – for the stronger countries to abandon the euro and create their own currency.

European countries with strong economies – Germany, the Netherlands, Finland and Sweden – should simply walk out.

I'd like to take credit for breaking new ground with this idea, but I can't. Former head of the Federation of German Industries, Hans-Olaf Henkel, writing in the Financial Times recently proposed this alternative solution as well.

Still, it's worth subscribing to for a number of reasons.

To begin with, it would absolve the strong countries of their liability to prop up their weak Mediterranean sisters.

It was one thing when only small countries, such as Greece, Ireland and Portugal needed propping up. But now Spain, with a collapsed housing bubble and eight years of bad management, and Italy, with the most debt of any country in the EU, are at risk. Both of those countries' economies are large enough to put a sizeable dent in even Germany's vast wealth.

Even more ominous, storm clouds have started swirling around France, which is still rated AAA but does not deserve to be. The country has not balanced its budget since the early 1970s, and public spending has soared on the back of hopelessly uneconomic schemes such as the 35-hour workweek.

Now the French government has come up with a supposed solution – one that consists entirely of tax increases.

So it's clear now that something must be done. And the solution I support has benefits for both strong and weak Eurozone countries.

The Benefits of Breaking Up

For the stronger countries, leaving the Eurozone voluntarily and forming a new, stronger euro currency would…

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The Future of the European Union May Be Decided in Less than a Week

The clock may be ticking on the future of the European Union (EU).

After being shaken to its core by the sovereign debt crisis, the entire Eurozone now runs the risk of blowing up within a week.

Germany's highest court, the German Federal Constitutional Court, on Sept. 7 rules on the legality of German participation in the euro rescue fund that was established to bail out Greece.

If the court rules that Berlin's commitment to the European Financial Stability Facility (EFSF) goes against EU law, or worse, against the German constitution, the entire Eurozone could collapse.

Think of the Eurozone as a minefield full of bombs that have long lay dormant, but are all still very active. Now, Germany's court ruling – itself a single bomb timed to go off next Wednesday – could ignite a massive chain reaction.

Germany: The Eurozone's Bomb Squad

Peripheral Eurozone countries like Portugal, Ireland, Greece, Spain, and Italy (the PIIGS) are in serious trouble and European banks face monumental liquidity and balance sheet issues.

So far, only Germany's singular fiscal conservativism and economic strength have kept the EU from self-destructing. But now the Eurozone's only legitimate bomb squad may be hanging up its lead-suits, pliers, and contagion containers.

What's at issue for the Constitutional Court is whether Berlin broke the EU's Maastricht Treaty, which unequivocally stipulates that member states cannot assume each other's debts. And, more germane to German citizens and the center-right coalition government, will be the Court's ruling on whether German Chancellor Angela Merkel's decision to fund the bailout facility circumvented constitutional requirements to put such fiscal matters before the German parliament.

And while the court isn't ruling directly on the EU's currency – or Merkel's support of it – the decisions rendered will have consequences for the euro's future and by extension, the EU as a whole.

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Russian Arctic Oil to Give Exxon Mobil Leg Up on Rivals

With fresh sources of oil becoming increasingly scarce, Exxon Mobil Corp. (NYSE: XOM) scored a major coup on Tuesday by making a deal for access to the vast reserves of Russian Arctic oil.

Many companies were in the hunt for the Russian Arctic oil, including BP PLC (NYSE ADR: BP), Royal Dutch Shell PLC (NYSE ADR: RDS.A), Chevron Corp. (NYSE: CVX), Total SA (NYSE ADR: TOT) and Statoil ASA (NYSE ADR: STO), but it was Exxon that walked away with the prize.

The arrangement with state-controlled Rosneft (PINK: RNFTF) gives Exxon a significant advantage over its major rivals — all of which have struggled in recent years to replace the oil they're extracting with new sources.

Rosneft, in which the Russian government has a 75% stake, estimates the three Kara Sea blocks where Exxon will be exploring contain about 36 billion barrels of recoverable oil.

"If that figure is correct and Exxon is able to produce the fields, we are talking about one of the world's largest oil discoveries in the last 50 years," Fadel Gheit, an energy analyst at Oppenheimer & Co., told MarketWatch. "But it remains to be seen how much of that oil is economically recoverable."

Rosneft estimates total reserves in the area at about 110 billion barrels of oil equivalent – an amount four times the size of Exxon's proven global reserves.

Quid Pro Quo

Having access to reserves of that size will help Exxon rectify its replacement ratio for oil. Earlier this year Exxon reported that for every 100 barrels of oil it produced, it found just 95 barrels of new oil.

Exxon has been more successful in replacing natural gas resources – it finds 158 cubic feet of gas for every 100 it extracts. But with natural gas prices slumping, the company would much rather find more oil.

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Western Oil Majors Will Get the First Crack at Libyan Oil Production

Countries that supported the overthrow of dictator Moammar Gadhafi's regime are likely to get first crack at post-war Libyan oil production, while those that sat on the sidelines are at risk of losing out.

"We don't have a problem with Western countries like the Italians, French and U.K. companies. But we may have some political issues with Russia, China andBrazil," Abdeljalil Mayouf, information manager at Libyan rebel oil firm AGOCO, told Reuters.

Talk like that has many Western oil companies licking their chops. Meanwhile, officials from China and Russia are foundering for ways to deal with the emerging Libyan government, the National Transitional Council (NTC).

Although Libyan oil production before the uprising comprised just 2% of global output, it is prized because it is of the light sweet crude variety – it contains less sulfur than most other oil and is thus cheaper to refine.

The deputy head of the Chinese Ministry of Commerce's trade department, Wen Zhongliang, tried to stay positive when asked about Mayouf's statement last week.

"We hope that after a return to stability in Libya, Libya will continue to protect the interests and rights of Chinese investors and we hope to continue investment and economic cooperation with Libya," Wen told a news conference.

But other Chinese observers were indignant.

"I can say in four words: They would not dare; they would not dare change any contracts," Yin Gang, an expert on the Arab world at the Chinese Academy of Social Sciences in Beijing, told Reuters.

Although China was getting only about 3% of its oil from Libya, the Asian giant's rapidly growing economy has given it a ravenous appetite for energy – including oil.

China abstained from the United Nations vote that authorized force to protect civilians during the uprising, and along with Russia and Brazil opposed sanctions against the Gadhafi regime.

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How to Find Energy Company Value in a Schizophrenic Market

The market remained highly volatile as we wound up last week. But the reason for that chaos seemed to be shifting from U.S. debt concerns back to the condition of credit in Europe.

Debt contagion in Western Europe was the primary reason for last week's market dives. The focus is now the condition of European banks – a disquieting shift when you remember the cause of the market slide beginning in late 2008…

Then, the credit crunch was enveloping economies worldwide. Banks could not get overnight funds from other banks, so access to business loans dried up, and the prospects of deep recession (or worse) led the worries in the United States and Europe.

At least the banking system is much better off this time around (even though financial institutions continue to withhold trillions of dollars from the flow of credit).

Now comes word that French banks may have the same endemic problems already identified in their counterparts elsewhere in Western Europe. If the trouble is real – and last week's actions by Asian banks do render credence to it – that will guarantee further turbulence in trading markets.

So much for Standard & Poor's example of France as the model for setting the U.S. debt house in order.

Actually, why anybody still lends any credence to these fiscal alchemists on sovereign debt matters is beyond me. The sub-prime collateral mortgage obligation catastrophe indicates they are not so hot on the private issuance side, either. Ultimately, whether the debt bubble is buried in commercial bank ledgers or in the public budget does not change the issue. It will have the same net effect when it bursts – disaster.

We should demand some accountability for rating agencies to understand what they are reviewing and forecasting. Otherwise, I would be about as successful with a Ouija Board.

One other matter before I stop kicking this dead horse…

If you already receive Kent's newsletter, there is no need to sign up (you've already received this report as part of your existing subscription). But if you aren't a subscriber, take a moment to sign up below to receive this article — and to receive other weekly insights from one of the best-connected energy-sector gurus you'll ever find. It's free.

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Lack of Panic Suggests More Market Downside to Come – And Buying Opportunities After That

According to the Bloomberg News, the recent sell-off has scraped a staggering $3 trillion from U.S. markets and a whopping $8 trillion from global markets between July 22 and Monday of this week.

And still the pros aren't panicking, which suggests to me there's more downside ahead – a lot more.

Indeed, I see the very real possibility that we could re-test the bear-market lows of March 2009.

You can dismiss this warning if you wish. But having navigated global financial markets for more than 20 years, I've learned that sentiment is one of the most powerful indicators of all – perhaps the most powerful indicator.

So the fact that the pros – including our politicians (I think everyone now understands that Wall Street and Washington are linked at the hip) – haven't panicked in the face of this bloodbath suggests one thing: They believe they understand the risks that we face – and that's almost a de facto indication that they don't.

You can analyze all the data you want, run through the market fundamentals and gaze at your technicals until you're in a chart-pattern-induced coma.

At the end of the day, the direction the markets move is entirely dependent on how people feel.

And that, my friends, is the classic definition of market sentiment.

How do we know?

When it comes to professionals, we can turn to the Investors Intelligence Survey, which evaluates marketing-timing signals from professional-investment newsletters nationwide. As of Tuesday, the bulls represented 47.3% – and the bears held their own, with 23.7%. That compares with the prior week's data, which showed 46.3% in the bullish camp and 24.7% of the bearish persuasion.

Or the AAII Investor Sentiment Survey, which attempts to measure the percentage of individual investors that are bullish, bearish or simply neutral on the markets. For the week ended Aug. 20, it's pretty balanced – with 33.4% bullish, 21.8% neutral and 44.8% bearish.

Both are far from the extreme readings that are typically associated with market reversals – either to the downside or, as many investors are now wondering, to the upside.

On May 2, I stated in a Money Morning column that "even the most strident pessimists had become optimists." Therefore, I was extremely concerned about the downturn that has led us to where we are today. That's the sort of extreme I am talking about – when everybody goes to one side of the boat.

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Why China's New Futures Market is Bullish for Long-Term Silver Prices

If you're still bearish on long-term silver prices, you'd better reconsider your stance.

Dollar-denominated Chinese silver futures were scheduled to begin trading on the Hong Kong Mercantile Exchange early today (Friday). This development will grant Asian investors direct access to the metal, and will blunt the U.S. dominance in silver-bullion trading.

It's also highly bullish for long-term silver prices.

Let me explain …

A New Catalyst for Silver Prices

The Hong Kong Merc's entry into the silver-futures market is a game-changer – for a number of reasons. For one thing, the emergence of a new market player will effectively neuter U.S. elitists like those at the Chicago Mercantile Exchange (CME).

I specifically mention the CME because that exchange unilaterally raised margin requirements on silver by nearly 100% in a mere eight days this spring – after silver prices had soared more than 160% between late August and the end of April. The CME action helped cause silver prices to plunge by 30% from the just-achieved, new-record highs of more than $50 an ounce.

  • I t hasn't recovered. [ Silver was still trading in the $39-an-ounce range as of yesterday (Thursday), according to Bloomberg LLC .]

Longer-term – and probably even more significantly – this move will help investors in China and India buy into bullion. In fact, this will be the first time Chinese (and many Asians in the surrounding markets) can purchase silver-futures contracts and, by implication, take delivery. Historically, investors in those markets had to purchase CME-based contracts that are standardized and traded through the Hong Kong Futures Exchange – in accordance with the Chicago-based CME.

In case you aren't familiar with them, futures contracts require the buyers to be prepared to take ownership and delivery when the contract comes due. Like any other "contract," futures are legally binding agreements for delivery of the underlying asset (in this case silver) at an agreed-upon future date and at an agreed-upon price. Further, they are standardized by futures exchanges with regard to quantity, quality, time and the place of delivery.

Only the price changes, which is why futures contracts can offer more financial flexibility, leverage and financial integrity than trading the underlying physical assets themselves.

Asia is already becoming a bigger factor in the silver market. From 2008 to 2010, silver demand soared 17% globally – including 67% in China alone (reaching 7,495 metric tons), according to the Hong Kong Merc. In fact, China accounted for nearly 23% of global silver consumption last year …

That makes the new futures contracts an even bigger deal than most investors have yet to realize.

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Does the Eurozone Have Its Own Lehman Bros?

Does the Eurozone have its own American International Group Inc. (NYSE: AIG), or worse, its own Lehman Bros. when it comes to Greece?

I believe it does.

Why else would the European Union have bent over backwards to "save" a member nation that: A) Accounts for 2.01% of the EU by trade volume; and B) Would essentially be like letting Montana go out of business – no offense to Montanans or Montana!

More to the point, if things really were under control, why would European Central Bank President Jean-Claude Trichet say that risk signals for financial stability in the euro area are flashing "red" as he did following a meeting of the European Systemic Risk Board in Frankfurt?

The short answer: Because he knows what the European banks are desperately trying to hide from the rest of the world – that there are still enormous risks and they're even more concentrated now than they were in 2008 at the start of the financial crisis.

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Netflix Inc. (Nasdaq: NFLX)Chases Hot Profits in Latin America

Netflix Inc. (Nasdaq: NFLX) delivered big news this week to those doubting its stock can keep up its meteoric rise: It's going global.

The online video service announced Tuesday it will expand into 43 countries in Latin America and the Caribbean, giving investors another reason to bet on its long-term growth.

The move means Netflix has access to a brand new avenue for profit, instead of focusing solely on the developed North American market.

The announcement pushed Netflix shares up about 8% Tuesday. Netflix's phenomenal 1,000% price jump since 2008 – 68% this year alone – has short sellers in a frenzy, thinking the company must be due for a significant pullback.

But as we told you in May, those doubters should reconsider their stance.

Netflix has revolutionized the way people watch movies, and is transforming the way people watch TV. Now it's implementing its media innovations on a worldwide scale.

Netflix joins the growing group of U.S.-based companies like PepsiCo Inc. (NYSE: PEP) and General Motors Co. (NYSE: GM) in targeting emerging-market growth, and analysts say the ventures will pay off.

"I like the fact that Netflix is growing aggressively into emerging economies because that's clearly where the spending patterns show money is going to be," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "I think the latest estimates show that there's more than $1 trillion expected to flow into developing economies this year."

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Special Report: What is the Greek Debt Crisis, and What Does it Mean for Investors?

With Greece on the brink of default – and hanging over the global economy like a financial sword of Damocles – investors the world over are asking themselves the very same question, day after day: Just what is the Greek debt crisis, and what does it mean to me?

It means a lot.

In fact, the Greek debt crisis could prove to be the first in a series of sovereign-debt defaults that could even infect the U.S. economy, tipping it into a "double-dip" recession and reprising the bear market of 2009.

In short, this crisis is one you need to watch and understand.

Given the stakes, we decided to work with our panel of global-investing experts and put together this Money Morning special report: "What is the Greek Debt Crisis, and What Does it Mean for Investors?"

Our goal was to provide you with answers to some of the key questions about the Greek debt crisis – how it started, what's actually taking place, how it could affect the U.S. economy, and how we expect it to play out.

And with the help of experts Keith Fitz-Gerald, Shah Gilani and Martin Hutchinson, we also answer the most important debt-crisis question of all: "What should you do about it?"

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