Bumble in Brussels
Research for Online Investors

by John Dalt

10/27/11

European leaders were up most of the night solving the riddle of how to solve the sovereign debt crisis in the eurozone.  I wrote to our premium subscribers last night:

I think we may have crossed an important threshold; if the eurozone leaders finish their work tonight.  That answer is not in yet and it is past midnight in Brussels.

The important thing is; if eurozone leaders are able to kick the can down the road or even agree to a plausible plan to end the uncertainty we have been dealing with for the last three months I believe the market is primed to rally much higher.

Here is why.  I don’t see the reason it shouldn’t.  70% of corporate earnings have either met or exceeded expectations.  China’s latest economic numbers support a view that they are going to have a soft landing (manufacturing picked back up this month).  And the big one, there have been multiple statements by Federal Reserve governors that they are in support of another round of quantitative easing.

Honestly, it bothers me that I can’t see a negative right now.  I know it is out there but it has to be something hidden in the woods.

The next problem I see for the U.S. is the “super committee” not cutting spending and a possible downgrade by one or more of the rating agencies.  That will come in late November.  In the meantime, I think the market is primed to make a significant move higher…

The market is up big this morning.  It feels like the day after a blow out party, we are all hung over and looking at the carnage from the night before.  Who are the losers?  As always, taxpayers.

Who do you think are going to pick up the tab?  Germans, French and even Slovakian citizens are going to pony up higher taxes and be faced with higher interest rates to pay for the “Bumble in Brussels.”

We didn’t like the TARP program to bail out banks and even automakers in the U.S. because it transferred what should have been private losses to the public.  Bankers made money privately, but then transferred the losses to the public.  Detroit automakers (GM & Chrysler) ran their companies into the ground then took the public for a ride down mainstreet bent over a couch.

The politicians are all patting themselves on the back, they were able to save Greece and keep the eurozone together.  For now.  What they have really done is harnessed the eurozone's major economies future growth to the weakest economies.

Eventually it will fail.  They have simply forestalled the inevitable, and made the final play cost more.  But that is not polite conversation to have on such a celebratory day.  Today we rally.  Tomorrow, next week or next month we count the cost.

One of the similarities between the U.S. TARP rescue of the automakers and the Eurozone Greek rescue is the suffering bondholders.  Owners of GM bonds were treated roughly by the U.S. in bankruptcy court.  They were denied their safe “last dollar” status.  The same has happened to holders of Greek bonds.

Bondholders are being asked to “voluntarily” accept 15 euros in cash and a 35 euro 20 year bond backed by the European Commission for any 100 euro face value short term Greek bonds.  They take an immediate 50% loss on face value and wait twenty years to get most of the promised money back.  If they don’t…well let’s just say they will voluntarily accept this.

By making it “voluntary,” the bondholders are not able to trigger credit default swaps (CDS) which guarantee the face value of the Greek bonds.  Of course the CDS were written by other bankers and insurance companies.  The politicians don’t want them to lose any money.  It is better for bondholders to accept the voluntary conversion.  If they are a bank and the losses make them insolvent, the government might loan them money at a low interest rate.  The government may also deposit government receipts in compliant banks.  The bribery continues as the taxpayer picks up the tab.

How can anyone buy a eurozone bond in the future after being treated so roughly?  Why would you take the risk?  How could anyone consider a eurozone bond “safe” if they couldn’t insure it with a CDS?  The fallout from the current eurozone plan is bondholders will feel less safe and unwilling to buy Italian, Portuguese and Spanish bonds.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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