Portugal Melt Down
Research for Online Investors

by John Dalt

3/23/11

Portugal’s socialist government must eat a bitter pill.  To meet the requirements for a debt rescue from the European Central Bank (ECB) they must cut social spending.  Prime Minister Jose Socrates has vowed to resign if the plan is defeated.  The Socrates' government believes the package of cuts to state spending and pensions must be passed or the government will have to apply for an international bailout through the International Monetary Fund (IMF).

The socialist party has 97 seats out of 230 in the parliament, and need 116 votes to pass.  Debate is occurring this morning, which is late afternoon in Portugal.  Socrates is scheduled to meet with President Anibal Cavaco at 4 p.m. eastern time.

The Social Democratic party is the main opposition to the government.  In addition to offering resolutions to reject the plan, they have also called for snap elections.  Eurozone leaders are meeting in Brussels on Thursday.  Socrates plans to attend, regardless of the outcome today in parliament.

Portugal’s 10-year bond interest rates are quoted this morning at 7.83%, and five-year bonds are at 8.3%.  These rates are branded as unsustainable by economists, and will drive the country to seek a rescue if ECB guarantees are not available.  An IMF rescue would most likely require the country to raise taxes and cut spending.

If Socrates resigns, the President will call a snap election.  The constitution requires it would be held at least 55 days after he calls for the special election.  The outgoing government serves as a caretaker during this time and has limited powers.

According to Reuters, protesters have staged rallies the last two weekends.  Train operators in Lisbon went on strike yesterday, demanding higher wages.  Credit problems for eurozone countries can make U.S. treasury bonds more attractive as a ‘safe haven.’  This will hurt our position in the TBT etf.  TBT goes down if U.S. treasury interest rates go down.

New home sales numbers came out this morning after market open.  They were terrible, a record low.  The market expected 284 thousand.  We got 250 thousand homes contracted last month.  We have never shorted the home builders.  One stock commentator I respect thinks Pulte Homes (PHM) is a ‘dead man walking.’

I don’t recommend it because real estate values can change rapidly.  When this happens the undeveloped property can whipsaw a balance sheet against a short position.  I developed real estate for ten years, and luckily stepped out of the business before the credit crisis hit.  I completed my last sub-division in 2007.  Sometimes good business decisions are part luck!

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To the Mailbag:
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John's reply:  Our job is to help our subscribers, we take it seriously.

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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