ECB; Sterile or QE?
Research for Online Investors

by John Dalt

11/16/11

Italy’s bond interest rates moved higher in the secondary market yesterday to 7.01% on ten-year bonds.  This came after the troubled country sold five year bonds at 6.29% on Monday.  Spain’s sovereign interest rates rose to 6.29% and French ten-year bond interest rates moved higher to 3.59%.

Greece’s new Prime Minister Lucas Papademos acknowledged the country will not meet their deficit target for this year.  Italy’s new Prime Minister Mario Monti (Super Mario) is working to build consensus in his parliament for austerity measures.  Italy must have the eurozone’s financial support.  Italy has to roll-over $273 billion in debt in the next six months.  Higher interest rates on new debt plus debt issued to refund these maturing securities would mean much higher interest expenses for the country’s budget.

There is some hope for Italy, as they chose Mario Monti to replace Berlusconi.  Monti is a former European Commissioner so he is comfortable with leaders from other countries.  He is also a committed socialist.  Sometimes the only person that can sell a bitter program is one that has traditionally stood against the actions the program requires.  Ergo, a socialist is better equipped to sell austerity than a conservative.  We will see if it makes any difference.

France and Germany disagree on the role of the European Central Bank (ECB) in addressing the eurozone debt crisis.  The ECB bought Italian bonds in the secondary market last week and in the country’s new issue on Monday to hold interest rates down, but France wants the ECB to be more aggressive.

Interest rates have been climbing for France, Austria, Spain and the Netherlands.  French debt was priced 1.95% higher than similar German bunds Tuesday.  This is an insult to the French…they believe France is entitled to the same low rates as Germany.

German Chancellor Angela Merkel said “The way we see treaties, the ECB doesn’t have the possibility of solving these problems.”  Merkel said countries must implement agreed to reforms to gain the market’s confidence.

Reuters has an excellent article on the tug of war going on in the eurozone.  Very simply, France wants the ECB to engage in quantitative easing…printing money.  Germany does not.  Merkel maintains the ECB does not have the legal right or ability to print money.  Any bonds they buy must be out of "sterile" funds already on their balance sheet.

We think the present market strength is a bet on the ECB relenting and engaging in quantitative easing.  Happy days may be here again!

Penn State & Political Correctness

I am no Penn State Fan; I am no Joe Paterno fan. I am not a sports nut.  I do believe in protecting children.  I don’t understand the “mob rule” that seems to be taking over the Penn State affair.  First let’s recap the facts, as we know them today.

In the summer of 1999, Jerry Sandusky announces he will retire at the end of the season.  An incident between Sandusky and a child from the fall of 1998 is investigated; the D.A. monitors phone calls and decides no charges will be filed.  Sandusky maintains “emeritus status” with an office and access to Penn State facilities.

In 2002, Mike McQueary (a graduate assistant at the time and present assistant coach) saw Jerry Sandusky in the locker room showers with a 10-year old boy.  He says Sandusky was sexually assaulting the boy.  Sandusky disputes this but does admit they were snapping towels and the boy was playing around and “sliding on the floor.”

McQueary has told authorities he intervened and stopped the assault.  He did not tell anyone else until that night, when he told his father, who went with him the next day to tell Coach Joe Paterno.  Coach Paterno reported the incident to Athletic Director Timothy Curley.  The coach characterizes the story he was told as “fondling or doing something of a sexual nature.”  Curley notified Senior Vice President Gary Schultz.

Within a month, McQueary meets with Curley and Schultz.  McQueary tells them he witnessed Sandusky having anal sex with the boy.  Nothing is evidently done.  The police are not called.

Last week, Curley and Schultz were fired after being charged with perjury and failure to report the allegations.

What happened in all of the twists and turns in this sad chain of events?  We don’t know.  Paterno does not believe he was told the seriousness of the actions witnessed by McQueary.  He called his superior and reported what had been told him.  His superior questioned the eyewitness (McQueary).  Paterno did not have any legal duty to call the police under Pennsylvania law or University policy.  Paterno followed university policy in reporting the story as told to him to his superior.  He was not an eyewitness.  His information was second hand.

Why is Paterno being fired?  Would he be subject to termination if he would have called police and not his superior?  My guess is yes.  But right now, mob rules apply.

Ten years ago, after a high school football game my third daughter came home with a sad story of abuse.  One of her friends told her that her father was beating her. My wife and I talked with our daughter about the story she was told, and let her make the decision.  We drove to the police station and filed a report, and suggested they stop by the home to check it out.  We asked for anonymity if the stories were false.  We decided to err on the side of caution rather than let this girl be abused in her home.

She wasn’t.  The police spilled our name like a too full bucket of water.  We were embarrassed to be drawn into a teenager’s prank to gain attention.

The university is punishing Joe Paterno for following university policies and procedures.  He didn’t write them.  Penn State University executives did not fulfill their duties.  Paterno did.  Any other conclusion is mob rule gone mad.

Like my fellow school board members used to say when they couldn’t think of anything else intelligent to say, “We all want what is best for the children.”  Most of the programs that are promulgated under this sort of general “feel good” mentality are blindly followed and end in disappointment.  We think the present mob rule in Pennsylvania will end the same way.

Coach Paterno has been fired on nothing more than accusations.  Sad.  A man’s life’s work thrown under the bus of political correctness.

Mailbag:
Do you seriously think that regulation is driving healthcare costs?  Seriously..... Please, don't profess something you don't understand and have not experienced first hand.---subscriber C.B.

I am a surgeon who will have Medicare in two years and am very frightened by the prospect. I have lectured about socialized medicine and its effects on the population in general but specifically on the "old". If you stay well no problem, you will love it - because you don't have to use it. If you get sick you are at risk: doctors are already not getting paid enough to pay good attention to you… The only solution is to fight this socialist system of health care we have and institute, slowly and step by step, a completely free Capitalist system.  I just had to get this off my chest. People really need to understand what they are getting themselves into.---subscriber P.L. M.D.

John’s reply: I will go with the doctor.  This all was predictable when the government required hospitals to treat anyone that could walk into an emergency room over 25 years ago.  Personal responsibility evaporated.  After raising four girls, I have a lot of experience with “health care.”  Almost all were negative because of the socialized nature of the payments, and positive because of the great people that work so hard taking care of patients.

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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