Counting Days
Research for Online Investors

by John Dalt

7/21/11

Leaders of the seventeen eurozone countries are meeting today in Brussels.  French President Nickolas Sarkozy and German Chancellor Angela Merkel met last night to hammer out an agreement between the two leaders.  They were evidently successful as a draft proposal was presented, and immediately leaked to the press.

This emergency meeting was called to address Greece’s credit problems.  They need more money to fund the government and refund maturing bonds.  The IMF warned Tuesday night that “unresolved fiscal problems in Greece, Ireland and Portugal could spill over into other nations and threaten the global economy.”

The draft proposes to increase the size of the European Financial Stability Fund (EFSF) if necessary and allow the fund to purchase bonds in the secondary market.  The EFSF will also be allowed to loan money to banks, through their government, to shore up balance sheets and make loans directly to countries earlier as “precautionary loans.”

Loans from the EFSF would be for 15 years at 3.5% interest.  Previously, loans were for seven and a half years and commanded 4.5% to 5.8%.  Interest rate terms varied on past rescues for Greece, Ireland and Portugal as each was negotiated separately. Existing loans to those three countries would have their maturities extended and interest rates lowered to match the newer rates.  EFSF purchases in the secondary market would require unanimous approval by eurozone finance ministers.

The draft proposal also includes a ‘voluntary’ exchange of debt by private investors.  The eurozone will ask member banks to exchange notes maturing in less than 10 years for 30 year bonds.  This is calculated to save Greece approximately 20% in repayments.

Eurozone leaders are trying to get in front of the bond vigilantes.  They have been playing “Whack-A-Mole” as bond vigilantes moved from Greece to Portugal to Ireland.  Italian and Spanish debt has been under pressure in the open market.

U.S. credit markets are gyrating as rumors fly that a debt ceiling deal has been reached…and then denied.  We think this is a White House operation to raise hopes and build pressure on the House conservatives.  Unlike the eurozone, the U.S. has a “hard” deadline before Armageddon strikes.

That is the administration’s view and has been taken up by most talking heads and mainstream media outlets.  August 2nd is the last day to raise the debt ceiling.  After that date, the U.S. will not be able to borrow any more money to fund the government’s deficit.

If you have ever had a bank deny a loan, you know what a tough deal this is.  How are you going to pay your bills?  Politicians are suffering through the four stages of panic.  Their voices are shrill; they blame others for their actions and lament the good things they are doing that will be in danger if they don’t get more money.

Some are pouting and sulk around the halls quietly.  They chose to ignore the problem, thinking it will go away if they don’t admit it exists.  We haven’t seen a fight break out yet, but we won’t be surprised when anger is displayed by those who feel most wronged.

The last stage of panic is resignation.  When they finally realize that the only way out of the tough spot they are in is to go along with the requirements the bank places on them.

Cut out the family vacations (congressional travel, presidential czars, first lady vacations), cut back on the five star restaurants (EPA, NLRB, DOE), and cut back on the charitable giving (NEA, Public Broadcasting, HHS, DOA).  Everybody that is left is going to have to go to work, so quite telling the kids what to do all the time (cut regulations).

When the Senate and President get to the resignation stage they will realize that John Boehner knows how to count days.  Legislative leadership generally means you have to be able to count votes, but when push comes to shove counting days is a more important talent.

Here is why.  There are only two bills that have passed the House of Representatives that can lead to raising the debt ceiling.  Rep. Ryan’s budget plan last spring, and the Cut, Cap and Balance (CCB) bill that the Senate will debate on Saturday.

The President has said he will veto the CCB.  Will he veto it next week if it is the only bill on his desk to raise the debt ceiling?  Who will be to blame if he does?  The House did its job.  They passed a bill and sent it to the Senate.  There is not a requirement that the Senate and President like the bill.  If we want to set that standard, why do we have the House?

Speaker Boehner may be the best counter in Washington.  He knows how to count days.  I would like to take credit, but cannot.  The longer he stands firm, the more I believe someone passed him our article “Intractable Negotiators.”  If so, thanks to the agent!

The mailbag:
What do you think of the accelerated influx of puts? This was reported on Bloomberg. Are your indicators agreeing?  Please share your opinion with your readers. Thanks.—subscriber R.T.

John’s reply: Now is a great time to watch your stops, sell covered calls and buy puts.  We see volatility increasing in the next week.

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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