Eurozone Credit Watch
Research for Online Investors

12/06/11

We sent out Monday’s MarketToday on Sunday night to give you a heads up on our thoughts for the market this week.  We are going to continue to experiment with sending MarketToday out in the mornings.  This will allow us to pass on timely advice for the markets.  Monday traded as we expected, except for the Financial Times report that six eurozone countries with AAA ratings, including France and Germany, would be put on “credit watch negative” by Standard and Poor’s.  This let some steam out of the bulls and the market fell back below our resistance line at 1260.

According to the Financial Times, S&P is concerned about “the potential impact of what we view as deepening political, financial, and monetary problems with the European economic and monetary union.”

The shock of this headline was that it named Germany among the list of countries facing a credit downgrade if the eurozone problems are not addressed in a fiscally responsible way.  The Financial Times reported a draft statement from S&P referred to “…structural weakness in the decision-making process within the eurozone…”

According to the report, S&P is going to conclude a review after the weekend summit this weekend.  The market viewed this as putting additional pressure on France and Germany to agree on a common approach to the enhanced oversight they will propose to other eurozone leaders on Friday.

The story was later enforced by the Wall Street Journal.  The WSJ wasn’t happy with reporting a short credit watch list; they reported S&P was going to put all 17 countries in the eurozone on credit watch for a downgrade.  Six of the countries currently have a “AAA” rating.  They are Germany, France, the Netherlands, Austria, Finland and Luxembourg.

S&P did not include Greece and Cyprus on their list of countries to be on “credit watch negative.”  How much more negative can they be?  Greece is already rated CC (junk) and Cypress is already “credit watch negative.”

Talking heads on CNBC said this reinforced the necessity of the European Central Bank (ECB) to enter the market and start quantitative easing.  I think they are way off base.  Germany may let the ECB engage in some small QE, but only if countries sign on with strong austerity measures and bring runaway budget deficits under control.

This would not require ratification by all 17 eurozone country’s governments, only acquiescence by the countries affected.  As we wrote in Fed’s Dollar Velocity Play last Friday, enforcement is easily applied.  The ECB and EFSF will not support a country’s bonds in initial offerings or in the secondary market if they do not agree to budgetary oversight.  The ECB and EFSF would sell bonds issued by any country that did not adhere to the budget oversight agreement.

Die Welt newspaper in Germany reported Sunday the Federal Reserve may extend credit to the IMF.  The action would be in conjunction with other eurozone central banks.  The purpose would be to give the IMF more funds to loan to troubled eurozone countries.  Are these the same eurozone central banks that benefit from the Federal Reserve discounted dollar swaps announced last Wednesday?  Yes.  Whose side is the Federal Reserve on?

Turbo Tim Geithner is discussing ways the U.S. can help the eurozone in meetings this week during his visit to Europe.  The U.S. is pushing deeper and deeper into the eurozone debt crisis.  We will regret this when the U.S. is the target of bond vigilantes.  When the eurozone is removed from the list of dangerous bonds, where will they turn?  Who is the largest debtor nation in the world?  What county’s annual deficit spending is larger than Italy’s on a percentage of GDP basis?  Who owes over 100% of GDP in sovereign debt?  The U.S.

If the U.S. stock market rally fails look to short the market at 1250 or especially if we fall to 1238.  Violation of these levels of support open the trap door to lower prices.  We thought it would be later in the week, but headline risk is alive and well!

We spent most of Monday calling U.S. Representatives with our opinion on cutting Social Security contributions.  Number One, I implored them pass a bill to cut the contribution level to 4% for employers and employees, this would be in line with the President’s request.  Pay for it by increasing the contribution limit to the first $150,000 of earned income.  Make it permanent rather than just a one year “stimulus.”  Do you think we are nuts?

Number Two, the lower contributions would be voluntary to the employee and all funds would be paid into a 401k…and they would be barred from ever signing up for Social Security or receiving Social Security payments in the future.  Even at my age, I would consider it.

Rahm Emanuel famously said “Never let a crisis go to waste.”  House Majority Leader John Boehner needs to switch the debate and win the argument if Obama wants to continue with class warfare.

Editor’s note:  We have placed a new page under Investor Resources titled Frederic Bastiat Quotes.  Claude Frederic Bastiat was a 19th century economist, author and politician.  Some have referred to him as one of the father’s of the “Austrian School of Economics.”  That is pretty high praise for a Frenchman!  Here is one of his quotes to wet your appetite.

Everyone wants to live at the expense of the state. They forget the state lives at the expense of everyone.—Frederic Bastiat

John

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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