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03/12/12

Eurozone Finance Ministers are meeting this morning in Brussels to finalize the Greek bail-out deal.  The “new” Greek bonds started trading on the secondary market this morning.  The shortest maturity, at eleven years, were priced to yield 19% while the thirty-year issues were yielding 14%.  Normally, longer term bonds yield a higher interest rate than shorter term bonds.  When this natural condition reverses it is called an “inverted” yield curve.  The bond market is pricing in another potential Greek default.

Portugal’s ten-year bonds are yielding 13.71% this morning as bond vigilantes look for the next victim.  Bloomberg reports that Spanish and Italian yields have dropped below 5%  The ECB evidently bought short-dated Portuguese bonds on February 29 to stop the climb in interest rates.  Portugal’s debt is rated as ‘junk’ by Moody’s, Fitch and Standard & Poor’s.

Portugal ran a 4% budget deficit to the country’s annual GDP in 2011.  The government is cutting spending and raising taxes as part of the agreement made last year to receive $102 billion dollars in bailout money from the European Financial Stability Facility (EFSF) and the International Monetary Fund. Forbes reports that Portugal’s sovereign debt is about 110% of GDP.  The problem is the country’s GDP is shrinking under the austerity measures.  Portuguese GDP was down 1.1% last year and is expected to continue lower by 3.7% this year.  This year’s primary deficit is about 6% of GDP.

Forbes quotes an Barclay’s analyst’s opinion surmising that “If the Portuguese government continues to implement the programme satisfactorily, even if the fiscal and growth performance are weaker than expected, core eurozone countries will likely find it easier to explain continued support for Portugal domestic constituencies.”

In other words, the eurozone will support Portugal as long as they continue to live up to their agreements.  The ECB will continue to take Portuguese bonds as collateral for LTRO loans.  Private investors should be wary of Portuguese sovereign debt, but the eurozone and IMF will keep the country afloat until they can re-enter the public credit markets.

China threw the markets a curve this morning when they reported a trade deficit for February of $31.5 billion dollars.  This is the largest trade deficit in 22 years.  CNBC reports that imports increased 39.6% over last year while exports in February grew at an 18.4% rate.  China’s official Purchasing Manager’s Index (PMI) rose to 51.0 from 50.5 in January.

Sun Junwei, China Economist at HSBC, believes Chinese exports will continue to show weakness because of “mild recessions” in European economies and weak demand in the U.S. for Chinese products.  He told CNBC “Net exports will likely become a drag on GDP growth in the first quarter.”  Some traders see the silver lining in the trade deficit numbers in that it will allow Chinese authorities to weaken the yuan and loosen credit.

The market seems confused this morning.  The Greek credit crisis is out of the headlines…what to do?  We think the market is primed to move higher.  We have thrashed around 1370 on the S&P and 13,000 on the DJI for the last two weeks.  The Federal Reserve is meeting this week.  Inevitably, there will be some volatility around the FOMC statement after lunch tomorrow.  Everybody wants more QE.  We don’t see it at this point, so there will be disappointment from traders.  If we don’t get bad news to hurt the market, we believe we will see new highs in the next week or two.

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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