Less Murky Market
Research for Online Investors

by John Dalt

3/29/11

Two of the moving parts of the market are becoming clearer, or at least less murky.  Traders and investors know QE2 is going to end, and the future looks less rosy when viewed through these glasses.  The eurozone credit crisis looks more and more like a train wreck in slow motion.

Charles Plosser, President of the Philadelphia Federal Reserve Bank was speaking in New York on Friday.  He said the Fed would have raise interest rates and shrink its balance sheet “in the not too distant future.”  Mr. Plosser told his audience he was concerned continued quantitative easing could damage the economy through inflation.

As his remarks were reported, treasuries sold off.  Interest rates on the 10-year bonds hit 3.43% within an hour of his comments.  Todd Colvin, Vice-President at MF Global Securities said, “This is bad news for bondholders because if the Fed’s got to sell anything off their balance sheet, yields are going to go through the roof.”

According to Reuter’s, the Treasury has $99 billion in two, five, and seven year notes scheduled for sale this week.  Igor Cashyn observed, “It definitely could be the start of yields moving higher and taking back some of that flight to quality.”

The route to save the Eurozone got a little more complicated over the weekend.  Germany is the eurozone’s largest economy, and most reluctant partner in rescuing member states that will not reform their social benefits and national budgets.  In elections over the weekend, Chancellor Angela Merkel’s Christian Democratic (CDU) party was body slammed.  Deutsche Welle is one of our resources for this article.  Observers blame the nuclear crisis in Japan.

Chancellor Merkel pushed through a law last fall to extend the licenses of nuclear reactors.  Previously, all nuclear reactors were to close by 2021.  On March 15, her government ordered seven of the oldest reactors to shut down for a three-month review of safety practices at all of the nation’s seventeen nuclear generating stations.

As we reported in ‘Uranium, Bull or Bust?’ Germany generates 26% of the nation’s electricity with nuclear power.  The three-month shut down would end just as the summer cooling season was increasing demand.  With the likelihood of energy shortages, the public would have supported the reopening of the nuclear plants.

The Green party has used the nuclear crisis in Japan and eurozone financial rescues of Greece and Ireland to chip away at the Christian Democrats.   The Green party is full of environmental activists that don’t want any nuclear power, preferring renewable such as solar and windpower. They are also staunch collectivists.  They want the economy reformed to achieve socialist ideals and save the planet.  Put this against the backdrop of Merkel’s government reducing subsidies by 15% for solar projects starting in June!

Back on Feb. 20, the CDU party only received 21.9% of the vote in the first of seven state parliament elections.  That vote was in Hamburg, Ms. Merkel’s hometown.  CDU had won 42.6% in the last elections held in 2008.  The Green party took 11.2%.  CDU will lose three seats in the Bundesrat (similar to the U.S. Senate).

On March 20, elections were held in Saxon-Anhalt.  CDU won 32.5%, but the Green party increased their take to 7.1%.  The CDU’s partner in the coalition government, FDP party did not even get 5%, the threshold for representation.

This past weekend, Baden-Wurttemberg voted.  It is Germany’s third largest state and had been solidly conservative, backing the CDU for the last 58 years.  That ended Sunday.  CDU only received 39% of the vote, the Greens got 24.2%.  Rhineland-Pfalz elections over the weekend saw the SPD lose their absolute majority, receiving 35.7% of the vote.  The Green party picked up 15.4%

There are five major political parties in Germany.  They are CDU, SPD (Social Democrats), FDP (Free Democrats), Greens, and the Left.  All lost votes except the Greens.

Germany refused to endorse or participate in the no-fly zone over Libya. German voters do not believe in this sort of interventionist policy. They also resent working until they are 67 years old to retire, while eurozone countries that seek credit rescues from the European Central Bank offer lower retirement ages and more generous benefits. Greece offers retirement to government workers at 58 and Spain at 55 years old.

There is another German election in May, in Bremen.  Two more will follow next September, Berlin and Mecklenburg-West Pomerania.  It is obvious that we will see Germany demanding stronger ‘medicine’ for countries that seek a bailout from the ECB, if they want guarantees from German banks and the government.  By the end of this year, Germany may withdraw from any rescue of other countries.  The Green party influence will force a “Germany first” attitude in foreign relations.  Do not be surprised by a plan for countries to exit the eurozone if they will not reform their economies.

This information should help you understand some of the undercurrents in the world economy. We wrote about the reduction in German solar subsidies in February. Watch some of your favorite solar stocks. They have been moving higher for the last ten days. Does the market anticipate a reinstatement of Germany’s solar subsidy?

To the mailbag:
I am pondering your words regarding helping your friend's widow.  Am I living my life to the most potential?  See you in Omaha!-paid up subscriber D.M.

John’s reply:  We become so engrossed in our lives each day.  I love what I do, find it challenging and rewarding.  I am not sure what is left when I leave this world.  Will the sum of my work be a friend going through my desk, car, office and closet to throw away all that seemed so important?  BRK here we come!

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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