Why Does Greece Matter?

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http://utmsb.convio.net/site/Calendar/659542804?view=Detail&id=108001




Now, on to what I read…




1. Markets

The market dropped 268 points and even went below 10,000 for a short period of time.  There are several fears in the market:

1. China slowing their economy
2. Sovereign debt issues
3. Fear about the US economy after the weekly unemployment number was released (see below)

The euro hit an eight-month low against the dollar. The euro has lost 9% against the dollar since December.  The dollar’s strength (and weakness in the economy) hurt oil and gold.




Crude oil fell 5% — due to a stronger dollar, slower economy and a move away from speculation.




Interestingly, gold fell 4.4%. Again, stronger dollar was one factor.  But, it’s interesting that investors didn’t flee to gold as a “store of value.”




Leveraged loans showing tiny amounts of life. There were $8.8 billion of new leveraged loans sold to investors in January.  In all of last year, there were only $38 billion.




2. Economy

Initial jobless claims rises unexpectedly. The number of workers filing new claims for jobless benefits rose 8K to 480K last week.  Economists had expected closer to 460K.  This was interpreted as evidence that companies are not confident in the recovery.  Of course, this is also impacted by the productivity increase (see below).  It will be interesting to see the jobs report on Friday morning.




Productivity increased at an annualized 6.2% in Q4. The rate was 7.2% in Q3.  Unit labor costs fell at a 4.4% annual rate in Q4.  This is a strong sign for profits.  Normally, we see productivity gains followed by employment gains and then wages increase.  It’s always interesting to see that productivity is a great thing in the long term (if people are more productive, they can be paid more and their standard of living increases), but it can be painful in the short term (we need fewer workers for the same amount of output).

I recently suggested some possible productivity improvements on the home-front.  Unfortunately, they were not particularly well received, even after I explained to Jenny that her standard of living could improve.  She then proved to me that productivity improvements truly can be painful in the short term.




Retail sales increased 3.3% in January (YOY). This was the biggest increase in sales in two years.  But the 3.3% is in comparison to January 2009, which was a terrible month.  Macy’s, Gap and TJX raised their outlooks for Q4 (most retailers’ Q4 ends January 31).




Friday’s jobs report. Lots of odd things could affect Friday’s jobs report including:

-       gov’t hiring could create 20,000 jobs

-       January employment usually falls by 2.6 – 3.6 million workers (because seasonal work ends); but fewer people were hired this holiday season and so fewer jobs will be lost, but there will still be a large seasonal adjustment




3. Sovereign Debt

Greece is a tiny part of the EU (only about 2.5% of EU GDP), so why do people care?  One reason is that investors also worry about Spain which is the 4^th largest member of the union.  Spain is twice as big as Greece, Portugal and Ireland combined.  Another reason is that it’s a reminder of all of the government debt that is being added worldwide in order to fight this economic slowdown.




The cost of insurance is rising. The cost to insure Greek bonds jumped to $429K / year (on $10MM of bonds). Portugal is at $210K, Spain is at $164K and Italy is at $137K.   Seven years ago, there were less than $3 trillion of CDS contracts outstanding.  Today, it is $25 trillion.




Here’s what’s interesting about the credit default swaps. To me, it represents pure speculation in that my belief is that no one really believes that Greece will default.  We all think that they could, but that the EU won’t let it happen.  But people trade these because they will react to the fear.  I could be wrong, but that’s my feeling.




Failed auction. Portugal was only able to sell 60% of the amount of bonds that they hoped to sell in an auction.




Spain chimes in with bad news. Spain raised their budget deficit forecasts for 2010 – 2012.




Does the idea of the EU work? When the euro was introduced in 1999, advocates argued that regulations on deficits would force weaker countries to become more competitive.  In reality, the union allowed weaker companies to borrow at lower rates during the boom times.  Now, they are suffering.




Moody’s comments on US debt. “Unless further measures are taken to reduce the budget deficit further or the economy rebounds more vigorously than expected, the federal financial picture as presented in the projections for the next decade will at some point put pressure on the AAA government bond rating.”  Absolutely prescient, isn’t it?




Not sovereign debt, but Berkshire is selling $8 billion of debt to help finance its acquisition of Burlington Northern Santa Fe.  Investors want short term debt and most of this issuance is very short in maturity.  But, it is an interesting comment that Buffett isn’t trying to lock in long-term rates.

S&P downgraded Berkshire to AA+. S&P was the last rating agency to downgrade Berkshire from AAA.  Do you feel better with Berkshire debt or Treasury debt?




4. Random

I had no idea that this was material information that had to be disclosed to investors! NY Attorney General filed civil charges against former BAC CEO Kenneth Lewis and the CFO for not disclosing losses about Merrill Lynch before shareholders voted to approve the acquisition.  (BAC reached a $150 million settlement with the SEC about the same issue.)  The issue is whether shareholders should have been told about $16 billion in losses in Q4.  Think about this, because it’s not that difficult.  If you owned a company (i.e., you were a shareholder) and the manager of the company acquired another company and didn’t tell you that the company had huge losses, would you think that was right?




Tough times for IPOs. Since early December, only two out of ten IPOs have priced within their expected range.  One IPO that didn’t price was FriendFinder Networks, a company that owns dating and sex-partner websites.  When companies go public, they offer some of the shares to friends and families (referred to as “Friends and Family shares”).  With FriendFinder, I think they should refer to it as “Friends with Benefits.”




You should google “rush limbaugh and retard” to read about this moron’s latest comments. I don’t care where you are politically, this is evidence that he is a total jackass.  Even if you’re a conservative Republican, this was a direct assault on Sarah Palin’s comments about her family.  If you want to read a really good commentary on the story, here’s one:

http://www.bloomberg.com/apps/news?pid=20601039&sid=anEaeFteiOKE
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