Eurozone Fail Possible
Research for Online Investors

by John Dalt

9/27/11

The market is rallying like there is not a care in the world. What? Slovenia is set to vote on expanding the size of the European Financial Stability Facility (EFSF) this morning. Finland votes tomorrow; Germany and Austria later in the week. Greece is voting on an increase in their property tax today. The European Commission wants to upgrade the EFSF from its present 440 billion euro plan to support only Greece, Ireland and Portugal. The EFSF would increase in size and be authorized to buy debt directly from investors.

The goal is to intervene in bond markets when interest rates move higher for any member country and averting price spikes in interest rates.  Will it work?  Short term perhaps, but without structural changes to bring individual country’s budget deficits under control, it could quickly be swamped with more demand than can possibly be financed.

U.S. Treasury Secretary Turbo Tim Geithner floated the idea of the EFSF being leveraged three weeks ago in Brussels to eurozone finance ministers.  The idea was criticized at the time, now it seems to be gaining popularity.  The ESFS could use their cash to guarantee sovereign debt or they could borrow money against owned sovereign debt from the European Central Bank.

The ESFS is funded by borrowing money with the guarantee of the seventeen members of the eurozone monetary union.  Individual country’s liability depends on the size of their contributions to the Eurozone Commission.  The new plan increases each country’s liability about 70%.  Six countries have approved the new EFSF structure.  Every country must approve the plan for it to be implemented.

Greece has applied for an 8 billion euro payment from its 110 billion euro emergency package from May 2010.  This would be their sixth draw on the package.  They must meet the austerity promises, tax increases and privatizations to bring their budget deficit down for the EU Commission, ECB and IMF to sign off on the payment.  Greece has said the government will run out of money for payroll and pensions in October if the money is not forthcoming.

What happens if one country does not ratify the EFSF increase?  There appears to be great hope in the market that every eurozone parliament and legislature will approve this package to help their neighboring countries. We think this hope is naïve.

A Fail in the Eurozone will spread Chaos through the markets.

Friday is the last day of the quarter.  Mutual funds and portfolio managers all participate in “window dressing” going into the end of these reporting periods.  Window dressing is the practice of making sure you own some of the reporting period’s best performers and dumping the laggards.  This reassures investors you were on some of the hottest trends, even if you bought the stock in the last few days of the period.

The next few days and weeks could be very interesting. The market is trading in a tight channel from 1120 to 1220 on the S&P.  Here is a chart showing support and resistance.

We are two weeks from earnings season starting. The eurozone could blow up at any time. Blind faith and hope in seventeen eurozone governments getting the religion of going into deeper debt and singing KUM-BA-YA to help their fellow man seems a stretch.

We are going through a period of adjustment that is creating extreme volatility in currencies, equities and commodities.  Don’t be misled by the apparent calm of a rising market that is trading in a predictable channel.  The channel will be broken..which way is the million dollar question.

We are witnesses to the destruction of the world’s monetary system.  Traders are rushing from one currency to another, one commodity to another…always seeking a safe haven.  The rally’s and crashes are breathtaking.  Hold on and be careful.

Quote:
We are on the verge of an economic collapse which starts, let's say, in Greece. The financial system remains extremely vulnerable.—George Soros

Mailbag:
I'm 'not buying it' either.  The silver-lining/programmer trading crowd bid the market up today on news that Germany was going to bail Greece out (2% of euro market).  However, late in the day Germany indicated 'whoa-not-so-fast'.---subscriber R.T.

John’s reply:  Everything may work out, but one bad headline and it will all be for naught.

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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