Twiddle-Dee, Twiddle-Dumb
Research for Online Investors

by John Dalt

9/20/11

The market sighed in relief yesterday with two hours remaining in the trading day.  Greek Finance Minister Evangelos Venizelos said the country held “productive and substantive” talks with the troika of the ECB, IMF and European Commission.  Greece needs the next tranche of 8 billion euros by the beginning of October, or state paychecks and pensions will start bouncing.  It appears there was a little miss-direction in the statement.

A source from the lender’s group said this morning that no agreement would be reached over the phone; officials would have to return to Athens.  Another video phone call was scheduled for today.  Officials are demanding cuts to this year’s budget before any money can be released.  Greece is promising as much austerity as necessary to win release of the 8 billion euros in aid.

The lender’s group realizes the cuts will not be made, if layoffs and employees are not terminated before the money is sent to Athens.

Standard & Poor’s downgraded Italy’s credit rating last night after the market closed.  The ratings agency cited Italy’s slowing economic activity and political stability as reasons for concern the government could achieve a balanced budget by 2013.

No Money From China

The Bank of China stopped foreign exchange swaps trading with French banks Societe Generale, BNP Paribas and Credit Agricole and also UBS of Switzerland.  Brazil offered to pump $10 billion dollars into Europe, but only through the IMF.  Brazil is lobbying Russia, India, China and South Africa (BRICS countries) to make co-ordinated purchases of eurozone bonds.

This morning, Eurozone commercial banks took 201 billion euros from the European Central Bank (ECB) in seven day funding.  This was the highest amount since last February.  Remember, the U.S. Federal Reserve has promised three tranches of money to the ECB over the next three months.  These loans would be longer than normal, at ninety days, to add dollar liquidity to the European banking system.

The landscape in Greece and the eurozone has not changed.  There is a growing recognition that Greece cannot repay their debts.  Kicking the can down the road gives the banks, and other governments, time to prepare for the inevitable.  As an investor, you should too.

A Greek default will have devastating repercussions.  Some of Europe’s largest banks will fail.  Surviving Eurozone countries will be hit with higher interest rates and taxes.  Unemployment will rise as some businesses will fail, or shrink, because of lost markets and currency adjustments.

The Federal Open Market Committee is meeting today and tomorrow.  They will release a statement after lunch.  “Operation Twist” is widely expected to be announced.  This means the Fed will start buying longer term treasuries to force down long-term interest rates.  This will narrow the spread between short term rates and long term rates.  This puts pressure on banks to loan money rather than buying long term treasuries.  It also allows the U.S. to extend maturities on the nation's debt.

Twiddle-Dee, Twiddle-Dumb

The market anticipates this, but it will still be a disruption to the market.  Why do we say this?  Because the market ignores that which does not hit someone in the head…witness Greece and the eurozone.  There is a 90% chance Greece defaults within the next six months and the whole eurozone is thrown into a crisis.  But, the market is merrily trading away as if all will be ok.  Twiddle-Dee, Twiddle-Dumb.

Buy precious metals on dips…you won’t be sorry.  We might have weakness short term, but can you predict the timing for Greece to fall apart?

Quote:
We must consider whether it would not be better for the currency union and for Greece itself to go for debt restructuring and an exit from the euro.--- Prince Hermann Otto zu Solms-Hohensolms-Lich, the Bundestag's Deputy President

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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