Debt Crisis
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Eurozone Debt Crisis: Now It's a Hopeless Game of Whac-a-Mole
The Eurozone debt crisis that was supposed to have blown over long ago instead has become more like an endless game of Whac-a-Mole, with both new and old problems popping up faster than European leaders can bop them.
As Europe's finance ministers gathered in Dublin today (Friday), they faced at least half a dozen major issues threatening the fiscal health of the Eurozone.
Although Europe's leaders, in concert with the International Monetary Fund (IMF), have succeeded in keeping a lid on each successive crisis over the past three years, that streak can't survive in the face of the new and old fiscal woes that have been peppering the Eurozone.
U.S. investors can't let those past successes deceive them into thinking the Eurozone is no longer a worry.
When the Eurozone debt crisis finally implodes - and sooner or later, it has to - it will hammer stock markets around the globe.
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The Trillion Dollar Trick
The birth, and the apparent death, of the trillion dollar platinum coin idea may one day be recalled as a mere footnote in the current debt crisis drama. The ultimate rejection of the idea (which was to use a loophole in commemorative coinage law to mint a platinum coin of any denomination) by both the President and the Federal Reserve seems to offer some relief that our economic policy is not being run by out-of-touch academics and irresponsible congressmen. In reality, our government has been creating more than one trillion dollars out of thin air every year for the past five. The only difference is that the blatant dishonesty of a trillion-dollar platinum coin is so easy to understand that the public simply couldn't be expected to swallow it. The American people are more than willing to be fooled, but they won't tolerate so simple a ruse.
People have a long and intimate history with coins. Some of us collected them as kids, and we all touch and see them every day. Unlike currency bills, we know intuitively that a coin's value is supposed to come from its metal content. That's why quarters are bigger than dimes.As a result, most people have viscerally rejected the platinum coin idea. To assign an arbitrary, sky high, valuation to a small piece of metal strikes most people as a deceitful, desperate act. They are right.
However, the same people have no problem with images of thousands of crisp paper notes flying off the printing presses. The acceptance is not impacted by how many zeroes the bills contain. People simply believe that paper money derives value from the numbers, not the paper. This was not always so. Paper money originally entered the public awareness as promissory notes to pay different amounts of gold. Once people got used to the paper, few really cared when the gold backing was finally removed. As a result, the public would likely have been much more accepting of the Fed printing a trillion dollar bill than the government minting a trillion dollar coin. But there was no legal pathway for the Fed to simply give that money to the government.
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The government, not the Fed, mints coins, so they did not have to rely on the Fed to create value out of thin air. That is why the platinum coin idea was so seductive, if ultimately unsellable.
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Stock Market Today: Do You Own This 30% Winner?
It was no surprise that the stock market today was quiet with little volume and not much movement.
In a day when the U.S. markets closed at 1 p.m. positive economic reports on motor vehicle sales and factory orders sent the markets slightly higher, and one company was up more than 30%.
Factory orders for U.S. factories rose 0.7% which was the first increase in bookings in three months. Last month's revised figure showed a 0.7% drop and economists had expected a 0.1% increase for June.
Many major automakers reported increased sales with U.S. automakers Chrysler, Ford and GM leading the way.
With the market off tomorrow and a shortened day today, traders expect a subdued state until Friday's latest unemployment numbers are released.
The major news came from British banking empire Barclays PLC (NYSE ADR: BCS).
Barclays PLC (NYSE ADR: BCS) announced Tuesday that its CEO Robert Diamond would resign effective immediately in the wake of the scandal involving lending rate manipulation.
Barclays was fined $450 million last week by British and U.S. regulators and is among other banks involved in similar lawsuits concerning rate fixing during the financial crisis of the past four years.
British Chancellor George Osborne cheered the resignation of Diamond calling it the "right decision" and encouraged banks to move forward and continue lending.
"We need our banks to be focused on lending to the economy, not on the scandals of the past, and I hope this will be the first step towards a new culture of responsibility in British banking which is what the British people want to see," Osborne told BBC Radio 4's "Today" program.
Diamond, who became CEO on Jan. 1 2011, is set to face British lawmakers tomorrow for questioning. Barclays stock fell 16% on June 28 when the scandal broke and is down almost 2% today.
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Can the U.S Economy "de-couple" from the Eurozone Debt Crisis?
As the Eurozone teeters on the edge of a breakup, it begs the question: Can the U.S economy "de-couple" from the Eurozone debt crisis?
Ultimately, the answer comes down to fate of the euro. It's the linchpin to everything.
From the point of view of one who has travelled fairly frequently in the Eurozone I can tell you I find the euro very convenient indeed.
In my London merchant banking days, when I used to go on marketing trips around continental Europe, I found that while the excellent European train service was a pleasure to use, the proliferation of local currencies made travelling a pain.
There was nothing more annoying than to be on a long-distance train that had just crossed the border from Belgium to Germany at Aachen, only to discover that I could not enjoy the excellent Deutsche Bundesbahn bockwrst and fine local beer because I had only sterling and Belgian francs in my wallet, but no deutschemarks!
The other problem was that after a long trip I ended up with my wallet stuffed with small amounts of ten different currencies, none of which could be changed back into anything useful because the bank charges ate up their value.
In southern Europe, local exchange controls were a pain too.
Walking through Madrid airport with $25,000 of legitimately earned pesetas in bills which could not be transferred to Britain through the banking system was far too exciting for my liking.
From a British merchant banker's point of view, it was thus very convenient when all the local foreigners converted to the same currency, rather than lots of different ones.
After that, you needed only two compartments in your wallet: one for British money and the other for foreign money. Then you could travel all over Europe without worrying about changing currencies.
It was a very 19th century feeling, almost as good as being back on the gold standard!
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Stock Market Today: Europe Concerns Ruling the Day
The factors weighing on the stock market today should sound pretty familiar to investors by now. The Eurozone debt crisis - with its carousel of struggling countries thirsting for a bailout - worsens every day.
Today the Spanish government made a formal request for more financial aid for its struggling banking sector. In a letter to Euro group Chairman Jean-Claude Juncker, who is also Luxembourg's prime minister, Spain's Economy Minister Luis de Guindos asked for up to 62 billion euros ($77 billion) in financial assistance for the recapitalization of the Spanish banks that require it.
This move was expected as yields on the Spanish 10-year bonds have been under tight scrutiny as they hover around the alarming 7% line.
Members of Germany, France, Italy and Spain on Friday agreed on a set of growth-enhancing policies equal to about 125 billion euros, or 1% of Eurozone gross domestic product. The European summit takes place later this week and investors are expecting less and less to come from the meeting.
In a bit of good news that doesn't seem to be impacting the sell-ridden market today, new single family home sales grew 7.6% to their highest level in two years. New sales were at a seasonally adjusted 369,000-unit annual rate, almost 20% higher year-over-year, but still a far cry from where sales should be in a healthy economy.
Here are some companies making headlines today.
Chesapeake Energy Corp. (NYSE: CHK) is in the news again and this time for anti-trust violations. Reuters reported today that Chesapeake, led by CEO Aubrey McClendon, conspired with its top competitor Encana Corp. (NYSE: ECA) to suppress land prices. The two companies apparently agreed through numerous emails to avoid bidding against each other at public land auctions to drive land prices for oil and gas fields down.
If these reports are true Chesapeake and Encana violated both federal and state anti-trust laws.
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The 2012 IPO Calendar: How to Spot the Winners
You might find yourself eyeing the 2012 IPO calendar with a bit more scrutiny after the Facebook (Nasdaq: FB) fiasco.
Although Facebook has been nabbing the most attention for disappointing its investors, it's hardly the first IPO to do so. It's all part of the fickle IPO process.
In fact, about 40% of the IPOs to hit the market over the past 12 months have seen their share prices fall below their IPO prices.
Facebook isn't the only factor to blame -- U.S. unemployment is up, the Eurozone debt crisis is sapping bullish spirit, and the upcoming U.S. presidential elections in November are adding to market uncertainty.
But avoiding IPOs altogether could also be a huge mistake.
Just ask those who bought the Google (Nasdsaq: GOOG) initial public offering. The Google IPO priced at $85, started trading at $100, and now trades around $560.
So how can you put yourself in the 60% group and earn a profit in the process?
With the right research and guidance, you can spot winners just like Google.
Do Your IPO Research
Investing in IPOs is like buying and selling any asset: due diligence is required.
An IPO, like a credit-default swap or subprime mortgage, is the ideal financial instrument for a limited set of circumstances. It is up to the individual or the institution to determine if the IPO they are considering is suitable for a long-term investment or a short-term flip.
If it qualifies as just a short-term flips, that is enough to tell you not to buy.
Whatever the investment objective, however, information is readily available for the necessary and needed due diligence.
For example, on March 17, 2011 Michael J. De La Merced wrote an article in The New York Times about the IPO of FriendFinder Networks (NYSE: FFN).
In his Timespiece,"FriendFinder Braves Choppy Market with IPO, Again," De La Merced did an excellent job of detailing his concerns with the stock, ranging from the disposition of the proceeds of the IPO to the accounting at the company to the number of times it had attempted to go public before and had to withdraw the offering.
FriendFinder Network IPO priced at $10 a share last year; it's now selling for around $1.15.
Other times an IPO can be hurt by factors having nothing to do with the financials of the company or the overall economic situation.
Take the Carlyle Group (Nasdaq: CG), a Washington, DC-based private equity group, which went public in May. Until Election Day in November, private equity groups will be vilified by the Obama Administration, unions and others due to Republican presidential candidate Mitt Romney's work with Bain Capital.
There is no way that can aid the share price of Carlyle Group. Now trading around $21 a share, Carlye Group has slipped from its IPO high of $22.45.
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Why the Eurozone Debt Crisis Never Really Went Away
How many times have we been told the Eurozone debt crisis is resolved, only to have it turn up again like a bad penny?
Last year's string of good news/ bad news on the Eurozone debt crisis had the markets going up and down like a yo-yo until the routine grew so tiresome that most people stopped paying attention.
But while the crisis faded into the background, it never really went way.
Remedies that were sold as solutions haven't solved a thing.
The celebrated bailouts of countries like Portugal, Ireland, and especially Greece have served mainly to postpone real solutions that would be far more painful.
"The Eurozone politicians in their infinite wisdom have concluded that it is easier to prolong the agony than to take their medicine," said Money Morning Chief Investment strategist Keith Fitz-Gerald.
In fact, the Eurozone debt crisis is getting worse.
Collective debt among the 17 member nations is on the rise, having increased from 85.3% of GDP (gross domestic product) in 2010 to 87.2% last year. That's the highest level in the history of the Eurozone.
Unemployment in the Eurozone rose in March to 10.9%, up from 10.8% in February and 9.9% a year ago. Manufacturing also declined last month, as new orders fell for the 11th month in a row.
And the austerity imposed on the troubled PIIGS (Portugal, Ireland, Italy, Greece and Spain) to bring their budget deficits and debts under control have actually made the situation worse.
"It's done no good at all," Fitz-Gerald said of the Eurozone's efforts to deal with the debt crisis. "It's an absolute travesty."
The steep and sudden cuts in spending are pushing most of Europe back into a recession, which will eventually be felt here at home.
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As Greek Debt Default Nears, Investors Need to Take Cover
At this point a Greek debt default is virtually unavoidable, and it could happen in a matter of weeks.
The ensuing chain reaction will upend markets around the world and will almost surely lead to more defaults among the European Union's (EU) other debt-plagued nations, collectively known as the PIIGS (Portugal, Ireland, Italy, Greece and Spain).
The bond markets have already passed sentence, with the yield on two-year Greek bonds spiking to an astronomical 76% yesterday (Tuesday). Yields on 10-year Greek bonds rose to 24%.
By comparison, the 10-year bond yields of another PIIGS nation, Italy, rose to 5.74%. Meanwhile, bond yields for the EU's strongest economy, Germany, have dropped below 2%.
The credit default swap (CDS) markets, where investors can insure their bond purchases against default, agree with the bond markets' verdict. As of Monday it cost $5.8 million and $100,000 annually to insure $10 million worth of Greek debt for five years, which means the CDS market now considers default a 98% probability.
Most European stock markets have been hammered over the past several weeks, with some dropping as much as 25%.
"Default is inevitable," said Money Morning Global Investment Strategist Martin Hutchinson. "Greeks are paid about twice as much as they should be, and that gap can't be solved by austerity."
How Soon is Now
In recent weeks Germany has shown more reluctance to dig deeper into its own pockets to bail out Greece and the other PIIGS. At the same time, Greece has struggled to implement the austerity measures that are required if it is to continue receiving aid from the European Central Bank (ECB) and the International Monetary Fund (IMF).
Greece's budget deficit has increased 22% this year, while its economy is projected to shrink more than 5%.
Every new development appears to bring Greece closer to the brink of default - and some see that happening in the very near future.
"My guess is there will be a Greek debt default by the end of this fiscal quarter - yeah, that means very soon," said Money Morning Capital Waves Strategist Shah Gilani.
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Don't Look Now but the National Debt Could be $23 Trillion by 2021
There was a lot of back-patting in Washington this week after U.S. President Barack Obama signed a debt-ceiling deal that he and members of Congress claim will reduce the national debt.
But here's the truth: This deal does nothing to reduce America's debt burden. In fact, the $14 trillion we owe now could every easily exceed $23 trillion by 2021.
That's a 62% increase.
It only takes a little bit of number crunching to see what I mean.
The deal brokered by Congress cuts spending by just $917 billion over a 10-year period, with a special congressional committee assigned to find another $1.5 trillion in deficit savings by late November.
Even if you round up, that $2.5 trillion in "savings" over a 10-year period is inconsequential when you consider that President Obama added nearly $4 trillion to the national debt in just a few short years in office.
How can you make any progress on the debt front when you're adding $4 billion in new liabilities every day?
And the story is even worse than that: According to the Congressional Budget Office (CBO), even the $2.5 trillion the government claims to be saving is quickly vaporized by inflation and lost economic output.
CBO: Contrary to Barack Obama
The CBO in January estimated that a 0.1% reduction in growth rates would increase the deficit by $310 billion over the next 10 years, while a 1% increase in inflation rate would increase the deficit by $867 billion.
The CBO projects the average growth rate from 2011 to 2016 will be 3.25%, and the non-partisan group has the average rate of inflation pegged at 1.55% over that same period.
However, growth in the first half of 2011was 0.8% and the personal consumption expenditures (PCE) inflation index - the type of inflation the CBO looks at - was 3.5%.
So let's do the math.
If growth and inflation statistics magically revert to CBO expectations - which would be a long shot considering how much they're already off - then the budget deficit over the next 10 years would rise by $928 billion. That alone is more than enough to wipe out the $917 billion of initial savings in the debt-ceiling bill.
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