Greece is the Word!

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Now on to what I read…




1. Markets

Rally! The Dow gained 150 points, but had been up as much as 231 points during the day.  In addition to good news about Greece, commodity stocks were helped by a cheaper dollar.




The euro rallied today, increasing to $1.378.  The currency strengthened as investors perceived less risk of the possibility of Greece defaulting.




Is the euro a good idea? There continues to be widespread questions about the euro.  How stable is a currency for a bunch of countries that share monetary policy but not fiscal policy?




2. Greece

The EU is considering a German guarantee of Greek debt. The bottom line is that they don’t want a Lehman type event to occur.  If Greece defaulted, expectations would change.  The new expectation would be that EU countries could fail.  Investors would start to worry about Ireland, Portugal and Spain.




Shrinking credit default swap premiums. As mentioned a few days ago, I continue to believe that Greece will not be allowed to default.  The market’s view moved more in that direction and the premium on credit default swaps shrunk.

Premiums on Greece’s credit default swaps narrowed from 4.21% to 3.91%.  Portugal’s tightened from 2.42% to 2.31%.  Spain’s stayed relatively flat at 1.62%.




Bernie Madoffopolis. Greece’s tax evasion is estimated to cost $20 billion per year.  It’s estimated that unreported income makes up 25% of GDP!  In the US, this is estimated to be 7.2%.  Italy, Spain and Portugal are all estimated to be around 20%.  HERE’S THE PROBLEM…these countries don’t have a one-time issue.  They’re just a mess.  A huge percentage of their population believes that it’s okay to not pay taxes.  This isn’t going to get fixed.




Moody’s spots a problem! Moody’s threatened to downgrade Greece further if they deviate from their plan to stabilize finances.  Moody’s said EU members are furious at Greece for falling into this situation.  Most importantly, Greece wasn’t really hurt by the financial crisis.  Their problems are just caused by poor management.  Here’s a news flash for Moody’s: the market has already downgraded Greece’s debt.  If this is what an A2 rating is, I’m scared crapless of what a BBB is.




Greece is okay! Nobel Laureate Joseph Stiglitz said that that Greece has a smart plan for whittling down their debt and the market is “hyperventilating” over the situation.  Of course, he’s serving as an advisor to Greece.  I think that there are legitimate reasons to worry about Greece.  It’s a clear reminder of all of the debt that governments have taken on.  It’s a reminder of problems that we face in the US.  It’s going to be difficult to finance all of this debt.  There are huge problems ahead over the life of our children.




Limited US bank exposure. The largest US banks have $176 billion of exposure to Ireland ($82), Spain ($68), Greece ($18), and Portgugal ($8).  The amount is small and most of this is collateralized.




3. China

China sentenced Tan Zuoren to five years in prison. He was convicted of subversion for writings which commemorated the Tiananmen Square standoff.  But, many believe that his real crime was that he questioned the government’s account of the school collapses after a 2008 earthquake.




Last week, Zhao Lianhai was formally charged for disrupting social order because he organized families to seek compensation and care for children who were made sick by tainted milk produced by state-run factories.  I get the impression that China wouldn’t really like plaintiff’s attorneys.  I know a few that I wouldn’t mind sending over to China.




People are also talking about the whereabouts of Gao Zhisheng, a human rights attorney who has been missing for a year.  Chinese authorities have refused to disclose any information on the matter.  But listen, this stuff isn’t important.  This is a big market and God forbid we don’t conquer it and earn more profits.




More pollution in China. China disclosed a report that their water was twice as polluted as they had claimed a year ago.  This report is both a positive sign and a scary message.  It’s positive that we see some transparency from China.  It’s scary to wonder if they’re still underestimating the real amount of pollution.




Should we trust Iran? Apparently Iran has started to enrich uranium at levels closer to weapons grade.  It’s never easy to know how true this is.  But, when intelligence actually believes that they can create a weapon, we’ll probably know.  There will be a puff of smoke coming out of Iran and an Israeli plane flying back home.  I would bet that we’re soon going to hear that our Administration is trying to restrain Israel from action.  Sanctions are being slowed by Iran’s ally…China.




China’s trade surplus in January was $14.17 billion, significantly below the median estimate of $19.7 billion.




4. Random




More Morgan Stanley fallout. Last week, I asked how shareholders must feel about the fact that 62% of Morgan Stanley’s revenue was paid out in the form of compensation and bonuses.  Today, we found out.  Apparently, some large shareholders ripped into the CEO over the issue.  Now, directors are considering a non-binding shareholder vote on compensation (similar to GS and other banks).  You’ve got to love a firm where shareholders have $1.41 billion in profits and employees receive $14.4 billion.




Partisan politics. One of the reasons I’m so negative on our prospects as a country is that politics have become so much more partisan.  I spoke about that on the webinar (on Tuesday) and to the Austin CFA Society (on Monday).  There’s a good article in the WSJ about the very issue.  Historically, there was approximately one filibuster each Congress in the 1950s.  Last Congress, there were 139.  That pretty much sums it up.  It’s horrible and it’s not going to get better.  Our system is broken.




Toyota recalled the Prius because of faulty brake systems. Their quality chief said that the brakes meet safety standards.  He argued that it was a matter of customer preference, rather than an actual problem.  Toyota felt the problem could have been handled more quietly.  I’d be a wealthy man if I had a dollar for every time that I tried to convince Jenny that I’m reaching the minimum standards and that we should handle our issues internally.  But no, she has to tell her mother and then I have to tell several thousand of my closest friends.




They’re right on top of this stuff, aren’t they? Moody’s and Fitch warned that Toyota is at risk of a downgrade. Moody’s has Toyota rated Aa1, while Fitch has them at A+. I haven’t looked at Toyota’s cash flow or debt level, but if the rating agencies were on the cutting edge, wouldn’t they have at least been talking about this last week? Don’t you think hedge funds have already reacted to this news?




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