Throw the Bums Out
Research for Online Investors

by John Dalt

5/23/11

When a company is failing and bought out, generally the acquirer will replace the old management.  This is understood because if they were any good, the company wouldn’t have been for sale.  Harsh…yes.  It is what it is, natural selection.

I learned as a child, growing up on a farm, that Mother Nature can be cruel.  Capitalism is a natural extension of “survival of the fittest.”  The wonderful thing in business is you can fail, declare bankruptcy and come back with your next idea.  We applaud the success and effort for the entrepreneur to pick himself up and go ‘one more time.’

Bankruptcy was so important to the founders of the United States; it is protected in Article 1, Section 8.  Citizens in the “Land of Opportunity” had the right to fail, erase the past, and pursue their dreams again.

Mother Nature is not so forgiving.  The penalty for being the slowest or weakest is generally death.  Politics is a hybrid.  We would like to think that politicians that failed would go quietly into the dark forest.  They could live out their days, but don’t bother us with your lunacy.  Sadly, many of the failed policies keep coming back like a boomerang.

There is no shortage of politicians that will promise anything to get elected.  Most adults realize that there is no free lunch, but common sense is sometimes suspended when confronted with the reality of the more difficult road ahead.

Europe is going through a “shake out” of the smaller, less competitive economies.  The creation of the Euro in 1999 was thought to raise all boats.  Every country would benefit from the stronger euro.  It worked for a while.  Everybody played nice.  Governments honored their commitments.  They kept their budgets in the prescribed deficit limit of 3%.  No country was supposed to increase deficit spending beyond this limit as they would endanger the financial standing of all seventeen members.

The temptation was too great.  Now we know that Portugal, Ireland, Italy and Greece increased or maintained unsustainable entitlement programs by increasing their deficits, thinking they could borrow more money.   And they could, until bondholders and rating agencies started looking at their budgets and realized the risk.  The security of owning Euro denominated bonds (the same as issued by Germany) was called into question.

In February 2010, investors realized all eurozone bonds were not the same.  German bonds were safe, French bonds were ok, Greek bonds were dangerous; Portugal’s bonds were questionable…and so on.  It didn’t take long for an acronym to appear in the press, “PIIGS.”  This stood for Portugal, Italy, Ireland, Greece and Spain.  The difficulty was that all eurozone bonds were issued at the same interest rate, which was set by the European Central Bank (ECB).

Saturday, Standard and Poor’s downgraded Italy’s credit outlook to “negative.”  Reuter’s tells us, Spain’s ruling socialist party only received 27% of the vote in regional and municipal elections.  This was 10 points behind the conservative Popular Party.  Italy’s center-right government lost support in local elections last week.  Polls in Greece show support for the center-right New Democracy party going into elections early next month.  This would mean the population turning their backs on the socialists who have promised it all.

We have documented the defeats of Angela Merkel’s Christian Democrats in German state elections.  The Christian Democrats have lost support because the government supported the eurozone bailout packages for Greece, Portugal and Ireland.  Voters are upset that their tax money goes to other countries to prop up generous retirement pension plans.  Finland voters voted more “True Finn” party members into power on a platform to stop the bailouts.

Voters are voting the bums out.  The party is over, and the tab is due.  Nobody wants to pick up the check.  What do the results from eurozone elections tell us about the ramifications of U.S. debt reform?  Will voters punish those who have created the debt, or those who offer painful fixes for the future?  We don’t know…

51% of American citizens do not pay income taxes…Who wants ice cream?

Quote:
“Men occasionally stumble on truth, but most of them pick themselves up and hurry off as if nothing ever happened.”--- Sir Winston Churchill

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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