Eurozone Changes Coming
Research for Online Investors

by John Dalt

11/25/11

Eurozone finance ministers are meeting in Brussels next Tuesday and Wednesday. The pressure is building to take some decisive action.  European equity markets have been down for the last seven weeks.  While we enjoyed Thanksgiving dinner yesterday, interest rates for eurozone countries edged higher.

Italian ten-year bonds closed at 7.11% and German bunds closed higher at 2.19%. The spread for France closed somewhat with an ending quote of 3.72%. French bonds had yielded 2% higher than German bunds earlier this week.

Fitch downgraded Portugal’s sovereign debt to “junk” status.  The leaders of the eurozone’s three largest economies met in France yesterday.  CNN reports that Italian Premier Mario Monti invited German Chancellor Angela Merkel and French President Nicolas Sarkozy to Rome for meetings in the coming days.  Angela Merkel and Nicolas Sarkozy agreed not to argue in public about European Central Bank’s (ECB) actions anymore.  Merkel said, “We have expressed our confidence in the ECB.”

The European Commission released a study on issuing European Bonds that would be guaranteed by all 17 members of the eurozone.  Germany has long rejected common bond issuance.  With the lowest interest costs, Germany would see their borrowing costs rise on a “blended” risk bond.

The leaders are preparing changes to European Union treaties to restore lost credibility.  The treaty would allow for more financial oversight of sovereign country’s budgets and debt issuance.  Merkel said “Countries that ignored the law were not punished in the past—Germany amongst them.  Now we are paying the price.”  We need to correct the fundamental floors in the construction of the eurozone.”

The changes will be released before the next EU summit on Dec. 9.  Reuters has a story the leaders may consider dropping a requirement for write-offs by bondholders.  Investors are losing confidence in any eurozone bond.  The forced “haircut” on Greek debt may have saved Greece money, but it creates uncertainty.

We think the market is ready to rally higher on any good news.  We are coming into the end of the month, with eurozone finance ministers meeting and possible movement by leaders of the three largest economies in the eurozone.

You may not want to be wildly bullish, but we would suggest caution with “short” positions.  You may get caught short.

Gold has been on a massive bull market in since early in 2001. Today's chart illustrates the pace of the gold bull market has only increased over time. Since peaking in early September 2011, however, gold has retreated. Each pullback has brought gold back down to support (green line) of its accelerated uptrend. Over the past two weeks, gold has declined once again and has crossed below the $1700 per ounce level and is once again testing support.  Ten years of history tell you to watch for your best entry.

Chart courtesy of www.chartoftheday.com

Mailbag:
You don’t think the Fed has been the buyer of last resort many times before?---subscriber T.M.

John’s reply:  It was hard to tell how deep the "invisible hand" of the Fed reached into the bond market last time.  There were sporadic reports the Fed had bought as much as 70% of certain issues, either as primary or from "straw men" dealers that bought the bonds and immediately resold them to the Fed.  It will get worse and be obvious to all if bond buyers pull away.

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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