Liability Management Exercise
Research for Online Investors

by John Dalt

4/26/11

The Euro is hitting new 52-week highs as the dollar is grinding out 52-week lows.  We understand the dollar being pummeled, a direct result of the U.S. monetizing debt on a grand scale.  The Fed is meeting through tomorrow, and is expected to continue ‘steady as she goes’ with QE2.  It would be easy to explain the euro strength as a natural reaction to dollar weakness.  In today’s money markets, it seems there is no normal.

A new polite expression has been coined for sovereign debt default, “Liability Management Exercise.”   Who is it being applied to?  Greece.  Yesterday, the Telegraph reported that Greece’s deficit hit 10.5% of GDP in 2010.  This was higher than previously estimated by the government.

It seems Greece is as lackadaisical in their calculations as they are in budgeting!  Greek 10-year bonds are selling to yield 15.5%. The high yield is recognition that the government will eventually default on their debt, if they do not make dramatic cuts to spending and increase taxes.

A London based Citigroup trader sent an email to his customers outlining the arguments for and against an early restructuring of Greek debt.  Greece’s Finance Ministry asked a local prosecutor to investigate Citibank to see if they broke any laws.

Perhaps in Greece it is illegal to put in writing what should be done about a problem.

Senior officials from the European Central Bank (ECB) and International Monetary Fund (IMF) are planning a trip to Athens next week.  They want to confirm that Greece is able to cut its deficit $15 billion dollars.

Greek media carried stories over the Easter weekend that the government was considering restructuring debt. This was attributed to an unnamed government official who said, “In the worst of cases, a rearrangement rather than a restructuring will take place in the future, featuring an extension of the repayment period for the loan, as has been granted for other countries".

The argument here is that somebody else did it, why can’t we do it?  Jose Manuel Gonzalez-Paramo, a member of the European Central Bank's executive board, warned on Tuesday a restructure would be "quite likely more devastating" than the fall of investment bank Lehman Brothers, which precipitated the financial crisis.”

Portugal revised their deficit number to 9.1% of GDP in 2010 last weekend.  Their target had been 7.3%

There is trouble brewing in Europe over sovereign debt.  We may see it explode in the not-too-distant future.  We have covered this off and on for the last 15 months, but it seems that investors have gotten used to eurozone credit problems, and discount the impact a “Liability Management Exercise” could have on the market.

Gold and silver are off today, after touching new highs.  Real money will come back with a vengeance when currency news shakes the market.

The Mailbag:
I advocate a simple solution to quell the raging price of oil by restricting its sale only to certified refineries. If Obama finds…traders jacking up the price for their profit only, screwing the common man in the process, then maybe my solution will be appealing---subscriber J.R.

John’s reply:  You have been drinking the Washington water too long.  Would you pay me $100 to make sure you had access to 1000 gallons of gasoline next year, no matter what happened in the Middle East?  Would you pay another $100 to make a little money on your neighbor’s gasoline?  That is speculation.  The market is pricing in the risk of demand outstripping supply as it is known today. The market is pricing in a small amount of 'risk premium' because of unsettling conditions in the Middle East.  The world economy is recovering; demand will continue to increase in developing countries.  We will see $150 oil in the near future, if the economy continues to improve.  This is not 100% sure or the price would be higher right now.  Rebels announced today that Libya's oil would be off line for 30 days.  There went the sweet stuff.

To blame the future pricing mechanism is not accurate; it is simply a way to divert your attention from the terrible policies that Washington foists on us.  You defended them being careful and not issuing deep water drilling permits.  Ok, now it is time to pay.  Did you agree with Clinton when he denied drilling in Alaska because it would take ten years?  That was twelve years ago.  Now it is time to pay up.  If you agree with not drilling off California, Florida, or in National Parks, monuments, federal lands...pay up.

The U.S. has more oil than Saudi Arabia, but we don't drill for it except in a few places far away from liberals and out of site. The State Department won't approve a new pipeline to bring oil sands syn-crude out of Canada to the U.S. The Chinese want to help; the Canadians are considering a pipeline to the Pacific. Where do you think the oil will go once it is on a ship? Pay up. Please, like my mom said, you made your bed, now lie in it. But please, don’t make me sleep with you! This is exactly what the environmentalists and liberals want. Cripple our country and economy. You, I believe are a smart man...Open your eyes.

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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