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Mark's Market Blog

10-22-11: France v. S&P

By Mark Lawrence

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The market oscillated this week on news that Germany and France had agreed on a solution to the Euro debt problem. Or they didn't. Or did. Or will this coming week. Meanwhile society is breaking down in Greece with 24/7 riots, public transportation shutting down frequently, trash pickup a thing of the past.


S&P 500 May 5 2011 to October 21, 2011

The world has ended. You may recall last May 21st was the predicted date of the Rapture, when the Good Souls were swept bodily up into heaven. I certainly wasn't swept up (no surprise there), nor any of my friends. Harold Camping, who made the prediction, now says there was a small math error, in fact Friday, Oct. 21 is the real date. I'm still here (no surprise there), and the market news I read indicates no huge sudden changes in the population on Wall Street or DC (no surprise there, either.) Maybe everyone in Nebraska and Alabama is gone, we wouldn't notice that for a few days. Given the mess we're making of this planet, were I God I would be worried about changing the culture of Heaven to a ghetto slum were I to suddenly import a billion or so well-meaning earthlings. In fact I might put up a border fence and require passports and 90 day visas.

Qaddifi, who vowed to never leave Libya, was as good as his word. Apparently he was found cowering in a sewer pipe and is dead now. Saddam was found hiding in a dark basement. These Arab rulers don't seem to have a very good sense of when it's over. What did it cost you? VP Joe Biden says we spent $2 billion on getting Qaddafi out of power, there are roughly 80m taxpayers, so your share was $25. A nice dinner at a good restaurant. I'd rather have the dinner. It is a relative bargain compared to the $6,000 per taxpayer war in Iraq. Qaddafi's final stand required 7,725 air sorties and 1,845 strike sorties, 397 of which dropped ordnance, and 145 Predator drone strikes. NATO aircraft, including those supplied by the U.S., totaled 26,089 sorties and 9,618 strike sorties through Wednesday.

The talk in Europe now is about Greek bonds going for 40% of face value. This will put an enormous strain on European banks. Greece has a population of 11 million; this bond haircut amounts to about $350 billion, about $35,000 per Greek citizen. Greece has a per capita GDP of about $32,000, so this proposed haircut means basically the rest of Europe is giving Greeks a free year's pay. Lending in Europe was really quite out of control. The IMF has indicated that perhaps they will pick up a third of the tab for bailing out Greece, but only if the bonds are priced at 50% face value or lower. Greece is not the end of it: Ireland and Portugal are in essentially the same condition.

That failing Belgium bank, Dexia - it turns out Dexia made very large loans to two companies, both of which sit on Dexia's board. The companies used the loans to buy Dexia stock, thereby propping up the price and Dexia's capital ratios. The stock was then given to Dexia as collateral for the loans. This is wildly illegal under both US and European laws, as if the stock price ever drops the bank's capital evaporates double fast. I'm starting to wonder why we have banks at all, if the social good they do outweighs the social costs. I am clear that there's a bunch of bankers that need to go to jail and pay some serious fines.

Yields on French debt are rising. A bunch. Fast. The bond market is deeply unimpressed with the current European bailout talks and is preparing for financial problems to spread and end badly. This used to be Greece, then Greece and Ireland, then the PIIGS. Now add Belguim and France. At least.


French v German Interest Rates

S&P dropped their ratings on a bunch of Spanish banks this week, and issued a warning on the rating of French, Italian, Spanish, Irish and Portuguese debt. S&P said in the case of a European recession or other stress like French bond interest rates climbing, ratings would likely drop (see chart above). France has proposed a set of EU laws to more or less outlaw the rating agencies. We're gearing up for war. Personally, I think it couldn't happen to a nicer group of people.

That European Summit scheduled for this weekend, the one where this is all going to get fixed? They've already scheduled a second summit for the coming week. Apparently one working lunch isn't going to be enough to screw the European taxpayers out of $3 trillion. The French and Germans would have you believe that this is all under control, it will all be fine, go ahead and keep buying bonds. I don't believe any of it. If it's all under control, why are the ratings agencies going to get outlawed? Apparently the current issue remains that France wants the European Financial Stability Fund (EFSF) to have unlimited borrowing power from the European Central Bank, and Germany thinks this will compromise the ECB and lead to uncontrolled debt and inflation. France of course is facing an enormous threat to their banking system and wants a guarantee of unlimited money, German thinks unlimited money will lead to everyone (meaning Germany) winding up in serious debt trouble and eventually with serious inflation. In Germany inflation is about as welcome as the black plague. The UK paper The Telegraph says that talks have completely broken down between Germany and France and it's almost inconceivable that there will be a deal this week. There's general consensus that European banks need at least $275b to recapitalize; some economists say a more correct number is $525b. The summit will most likely compromise on $140b or so. Remember, three months ago they had bank stress tests in Europe and Dexia passed with flying colors. This will not end well in my humble opinion.

China Eastern Airlines canceled 24 orders for Boeing's new Dreamliner 787. Analysts expect other Chinese airlines to scrap their orders for 787s as well. Boeing single-handedly accounts for 5% of all US exports, so this cancellation is a significant fraction of all China imports from the US. If I were a senator, I would be furious.

The Continuing Saga of Bank of America: When last we saw our heroes, their stock had dropped below $6 and was heading for the magic $5 number where many mutual funds have to drop the stock. BofA offered Warran Buffet a sweetheart deal to throw them $5 billion, which got their stock up over $8. How's that working out? Not so great. . . BAC is back into the 6s and will obviously drop into the 5s on the next stock market leg down. You can put a pink dress on a hog and bring it to the homecoming dance, but it's still a hog. The next time banks start to get eaten up by other banks, like how Wachovia disappeared two years ago, I expect BofA to be the first to go.

Occupy Wall Street: The protestors are railing against the top 1%. Who are they? The cut off is $350,000 per year in income, if you make less than that you're not top 1%. The average is $1m per year.

Sports: Business week: The Green Bay Packers have the best owners in football.

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