Know When to Fold 'Em
Research for Online Investors

by John Dalt

6/21/11

We have written about the Greek credit situation so much in the last sixteen months, I feel like I need to buy some Uzo, and have a stiff drink.  I have described the situation every way I can, covering all of the permutations and hazards the situation can expose us to as investors.  We have had a taste of the fear a Greek bankruptcy could cause in equity markets for the last six weeks.

Today it is over!  Or, is it?  The way the market is rallying, you would think it was.  Everyone seems to have come to the same conclusion we did last week.  A remedy will be found because the IMF, ECB and European leaders will all look like inept fools if Greece goes into bankruptcy.  Bureaucrats don’t like to look like fools, not as long as they have someone else’s money to spend to avoid it.

One could simply reduce the tensions in the eurozone down to a simple problem.  The Germans realize they are supplying most of the money to keep the bureaucrats from looking stupid.  German citizens realize they are going to look pretty stupid when they have to use all those Greek bonds their banks have bought to wallpaper mutti’s (grandma’s) kitchen.

The long view of the continuing credit crises in different countries is the resulting bankruptcy of every state that supports the bailouts.  All the bonds will eventually be worthless.  All the banks that bought them will be insolvent.  All the governments will have to raise taxes and institute austerity measures on their citizens because they backed the rescue of other countries.

I have described the situation in Greece like a pilot flying into a box canyon, there is no way out.  By the time you realize your predicament, all the options end badly.  We predict it won’t be long before the eurozone finance ministers adapt a regimen for countries to leave the eurozone.

The time is getting closer.  German and French banks simply cannot take the risk of buying all the bonds that Greece, Portugal, Italy, Ireland and Spain can print.  Every time a bank buys one of these bonds, they have purchased a depreciating asset.

The political leaders worked so hard to put this monetary union together 12 years ago and don’t know when to call it quits, yet.  They need to face the facts; they are trying to draw to an inside straight.

I'll argue, it would be best for everyone involved.  Greece could go back to using the Drachma; they could print a ton of them and inflate their way out of the present debt they owe.  They would be a failed state, with the IMF shepherding their economy out of the mess.  The playbook is clear for this sort of action, just like other third world countries, whose governments spent and stole the country’s assets.

This would leave the eurozone as a stronger entity, a union of country’s that adhered to strict guidelines concerning budgeting and credit.  Is it possible?  Not yet, but the time is coming.  The time may be much sooner than you, or Greece, think.

It is impossible to think that the governments and their populations will continue to ‘throw good money after bad’ to rescue countries that don’t exercise restraint in entitlement spending. It is time to “Know When to Fold ‘Em.”

Angela Merkel, Germany’s Prime Minister, has tried to slow the rescues and enforce some restraint.  Watch her.  We think she is the key to saying “No More!”  In the meantime, we expect the EUO etf to drop on any good news on the bailout of Greece.  This ETF is the Ultra Short Euro.  When the Euro goes up, it goes down twice as fast.  When the Euro goes down, it goes up…twice as fast.  Without changes, the euro will go lower…and lower, until it disappears.  This trade will be dependent on your reading of European politics, just buy it when you think things are about to get worse over the pond.

Don’t be too enthused about today’s market rally.  Headlines can change perceptions quickly.  There were less than 800,000 shares traded on the NYSE yesterday.  Rallies are not built on sand.  After six down weeks the market was so oversold, any good news would bring out some bargain hunters.

The mailbag:
I must disagree with both you and your subscriber. Without regulation (Commandments), society would be cutthroat, mean and miserable. A prime example of this is society during the Industrial Revolution. Many became extremely wealthy. However, the vast majority (men, women and children) lived on the borderline of poverty if they worked in "industry". No regulation is not a solution, nor do I believe that it is the problem. Unfettered control is the problem! The ability of governmental entities to promulgate and enforce regulations without Congressional oversight is the problem. The 90 day publication notice is a joke!

Congress should be in session 11 months a year, allowing one month for our elected Representatives to spend on other activities. They would not be paid for time spent away from their job in Washington, be it for boondoggles, investigations or campaigning. If every entity had an oversight Committee and could not promulgate or enforce any Regulation without Committee review and approval, I believe that many of the burdensome Regulations which now encumber our society would not exist.---Long Term and Buy, Sell, Hold subscriber R.A.

John’s reply:  I like your idea that oversight committees must review and approve any regulations.  This would put an end to a lot of the B.S.  On the other hand, since 2008 with Dems in charge of both houses is there any doubt the committees would have agreed to every Obama administration recommendation? The Congress has transferred much of their responsibility to Regulatory Agencies.

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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