More Europe More Pain
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6/4/12

Spain wants Germany to rescue the country’s banks, but that is not how the eurozone works.  All banks in the eurozone are governed by the countries they are headquartered in.  This means there is a patchwork of banking rules and regulations and differences in the perception of safety depending on the bank’s country of origin.

A German bank branch in Greece is governed by German law and backstopped by the German government.  Greek banks are governed by Greek laws and backed by the Greek government.  Since the Greek government is broke, their banks have very little backstop.

If their capital falls below European Central Bank limits, the host government must restore their capital before the bank can access funds from the ECB.  Understanding this explains the simplicity of a bank run occurring in Greece.  The money may simply go across the street to a German bank.

Spain’s banks are under-capitalized because of bad real estate loans from the real estate bubble busting.  Germany wants Spain to request a government bailout, which would allow the government to recapitalize the country’s banks.  Spain wants the European Commission to extend bailout funds directly to Greek banks.

Bottom line, Spain does not want more austerity that a bailout would require.  Politicians do not want to give up their freedom to meet voter’s demands for entitlements.  The standoff will continue until Spain’s borrowing costs reach the point of decision.  Spanish ten-year bonds were quoted to yield 6.39% in the secondary market this morning.  Greece, Portugal and Ireland were forced to seek bailouts when their interest rates on 10-year bonds went higher than 6.5%.

Germany is proposing tighter fiscal integration of the eurozone.  We will cover this more in days to come.  Reuters has a good background article. The debate is framed by a German official “The fundamental question is relatively simple.  Do our partners really want more Europe, or do they just want more German money?”

If you enjoy train wrecks, this is going to be fun to watch.  It is hard not to feel sorry for the citizens of Greece, Spain, Portugal and others.  They bought the lies their politicians were telling them until the money ran out.  Guess who is on the list of running out of money?  France.  Before it is over, Francois Hollande, the new socialist president of France, will have to bow to the Germans if he wants their money.

Get out the popcorn.  While we enjoy any opportunity to watch the French demonstrate how humble they are, I have this gnawing feeling there is something amiss.  Could it be because the U.S. owes more as a percentage of GDP than Spain?

The market got more bad news this morning shortly after open when the Commerce Department reported Factory Orders fell in April.  This was the third negative reading in the last four months.  Economists expected an increase of 0.2%.  March results were also revised downward.

Factory Orders is a minor economic report but the market is looking in all the nooks and crannies for good news right now.  The market ground its way down to 1266 on the S&P before catching enough support from anxious buyers to reverse and move back higher after lunch.

Make your list and check it twice.  Our long-term subscribers sold their market short etf for a nice gain this afternoon and bought two of our recommended stocks.  One pays 6.3% and the other 7.3% in dividends.  We are slowly converting the Long-Term Portfolio into high yielding dividend champions.  We want our investors to spend less time minding the store and more time enjoying nice returns with less volatility.

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