Arab Winter
Research for Online Investors

5/3/12

Noriel Roubini spoke at the Michael Milken Global Conference yesterday in Los Angeles.  He told the audience “The Arab Spring will become an Arab Winter.”  Roubini is famous for predicting the U.S. Housing crash in 2005.

Roubini sees Iran as the number one threat to the world economy as they pursue a nuclear weapon.  He believes this will lead to a confrontation with either Israel or the U.S. and Iran.  He does not believe President Obama will do anything until after the presidential elections even though he believes the danger will increase in the last half of this year.

Roubini also believes a possible breakup of the eurozone could be in the future. This would occur if the European Commission and European Central Bank do not devalue the Euro to inflate the economy out of the recession they are entering.  Countries will be tempted to give up the euro and use a national currency.  CNN quotes Roubini, “If enough…countries do that, the collateral damage in terms of losses to the creditors is going to be massive.”  He adds that European banks have too much exposure and “financial contagion would be significant.”

French President Nicolas Sarkozy met Socialist candidate Francois Hollande in a televised debate last night with four days until the election.  Bloomberg reports that Sarkozy “struggled” to land a decisive blow on Hollande.  The debate lasted almost three hours.

Hollande advocated the eurozone should issue “Eurobonds” that would be guaranteed by all countries to raise money for bailouts and growth initiatives.  Sarkozy retorted “Who will guarantee them if it’s not France and Germany?  Should we raise our debt to pay the debts of others?  It is irresponsible.”

The idea of Eurobonds was floated last year by the weaker countries in the monetary union and rejected.  We discussed it on August 15 in Buyers Euphoria.  Germany rightly saw it as an attempt by some to lower their borrowing costs at the expense of Germany.

The European Central Bank (ECB) kept interest rates at 1.0% this morning.  Central Bank President, Mario Draghi, held a press conference after the interest rate announcement.  Reuters reports he encouraged governments to continue fiscal discipline and work on growth strategies.   Draghi said “The economic outlook continues to be subject to downside risks…There are indications that global recovery is proceeding.  We continue to expect the euro area economy to recover gradually during the course of the year.”

Spain sold three and five year bonds this morning, paying 4.037% and 4.7525  These rates are much higher than the last offering commanded at 2.89% and 3.463% respectively.  France sold six and ten year bonds at lower rates than their last offering.

Initial Jobless claims fell to 265,000 last week which we thought would spur the market higher this morning.  European markets were trading higher during their session.  Shortly after market open, the ISM Non-Manufacturing Index released at 53.5 which indicates growth, as it is over 50.0  The market didn’t like the number as March’s number was 56.0 and expectations were for a 55.5

Tomorrow morning, the Bureau of Labor Statistics releases Non-Farm Payrolls and the Unemployment Rate.  Any reading over 150,000 could reverse today’s sell-off.  A reading less than 150k may push us lower to test the Bulls.

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