Volatile Week Ahead
Research for Online Investors

by John Dalt

6/27/11

The Greek credit problem is like a case of poison ivy, it just won’t go away.  Last week we heard the vote by Greece to approve deeper cuts in spending, entitlements and the sale of assets would occur this Tuesday.  This morning, we learn the debate will begin today, but a vote on the “framework” will not occur until Wednesday.

If the parliament approves the framework, or outline, of the five year austerity plan then they will hold votes on Thursday and Friday on legislation to implement the plan. Doesn’t this sound like a train wreck?  Greek Prime Minister Papandreou has 155 votes in the 300 member parliament.  That doesn’t leave his party much room to maneuver. A squeaker vote of approval on the framework does not bode well for approval of all legislative votes required to implement the changes.  Then we run into trouble.

If the five-year plan is not approved, the eurozone and IMF will not release more money to Greece.  There is almost $17 billion dollars available under the $155 billion program approved last year.  Another large package of aid is being considered to finance Greece while the country tries to bring spending under control and build their economy back from the present depressed level.

French President Nicolas Sarkozy announced this morning that French banks were prepared to roll over Greek debt to thirty-year notes.  This would give the Greek government some breathing room, since they cannot sell new bonds to investors.  The eurozone has been searching for a way to restructure Greece’s debt without creating a credit event that allowed credit rating agencies like Moody’s, Fitch, and Standard & Poor’s to downgrade Greek debt to junk.

A downgrade to junk on Greek credit would mean eurozone banks could not count Greek bonds at face value in their portfolios and would force some to insolvency.  French banks agreed to a plan that allows them to take 30% cash on maturity of Greek bonds, 50% would be invested in new 30-year Greek bonds, and the remaining 20% would be invested in a zero coupon guaranteed funds in higher quality securities.  Reuters reports that German Deputy Finance Minister Joerg Assmussen said they were monitoring the Greek votes and that “Rejection isn’t Plan A, or the most likely outcome but the eurozone and its financial sectors need to make preparations.”

The market is up this morning on cheaper oil and a stronger Euro.  Hope springs eternal.  Hope is not a trading strategy.  Be cautious, any adverse vote in Greece could make this euphoria disappear quickly.  It is best to stay neutral, don't be in a hurry to jump on a "bandwagon" that will take you to the city dump!  There is plenty of time to buy your favorite stocks.

The mailbag:
It disgusts me that the last war we “won” was WWII.  Everyone sacrificed then, not like now.---Long-Term subscriber J.P.

John:  I thought one of the big mistakes President Bush made was not requiring some "sacrifice" from the American people after 911.  It could have been a small across the board tax increase (for everybody all the way down to 0.00 income) or rationing of some kind, like on tires or something.  I thought a sacrifice to remind citizens that we were all in the conflict together was important.  It is too easy to go to war and feel no association by the populace.

You hit a triple with three comments, all from outer space.  Victory in Afghanistan is not possible in Afghanistan.  We went to smite Al Qaeda.  We did that soon after invading that Medieval nation.  Generals like wars.  It is their profession.  They are not peacemakers, they are war fighters.  Excessive spending by our government is not socialism.  It is simply our political process.  Politicians cannot get elected by saying “No” to constituents and special interests that want access to the public trough.  Raising the debt ceiling is merely retroactively approving spending obligations.  Both parties have erred by failing to appeal to the public.  Neither party has made it clear we don’t have the money to continue or that it is impossible to tax our way to prosperity.  Printing more money won’t work either.  I propose a simple tact, cut all programs and entitlements 5%, across the board.---subscriber J.R.

John:  I can agree with you on Afghanistan.  I fear when our hand is removed from the bucket of water, we won’t see the imprint from it.  When we leave Afghanistan, the country will revert back to the Taliban, or other thugs and warlords.

I don’t like ‘nation building.’  This is Colin Powell’s legacy. His famous quote, “You break it you own it” implies a responsibility to fix everything in a country when we take military action.  I disagree.  We should have killed the bad guys, and come home.  If the country harbors terrorists again, and they endanger our country, we go back and whack them again.  The excessive spending by our government is because of creeping socialism and progressive policies for the last 100 years.  There is no limit to “the good” politicians can do with other people’s money.  I would point out the Republicans have consistently argued/pointed out we cannot continue spending so much and borrowing close to half of the federal budget.  They also have pointedly argued that the country does not have a taxing problem but a spending problem.  Thus, they are opposing any tax increases in the negotiations to raise the debt ceiling.

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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