Posts Tagged ‘European debt crisis’
The last two years have obviously been extremely difficult for bank stocks. The financial crisis that took hold of not only America but the rest of the world as well has caused extreme strain across the entire financial sector. However, since the financial crisis several years ago, American banks have substantially shifted their risk and investment strategy and are on a much more solid footing now.
While smart investors used the selloff in bank stocks as an opportunity to buy, this investment strategy has not worked for all firms. Not all bank stocks have recovered what they lost, even though they all went up massively this year. While some bank stocks like JPMorgan Chase & Co. (NYSE/JPM) are only down approximately five percent over the last five years, Citigroup is still down a massive amount. Recently, the CEO of Citigroup, Vikram Pandit, was ousted by the Board of Directors, mainly due to the fact that during his tenure, the stock has gone down over 85%.
While he did take over during a difficult time for bank stocks, his investment strategy is obviously flawed. The Board of Directors has decided to appoint Michael L. Corbat as the new CEO. When it comes to bank stocks, Corbat appears to be an interesting choice. First, he’s a long-time member of the Citigroup family. He’s also slightly lower-key than top CEOs like Jamie Dimon. Communicating confidence and leading is extremely important for a CEO. Obviously, considering the strong rebound in the share price and performance of JPMorgan, Dimon is the true standout amongst CEOs for bank stocks.
I see two reasons the board … Read More
The U.S. national debt just surpassed the $16.0-trillion level and is accelerating with each passing minute. The problem is that with the U.S. economy slugging away and an unemployment rate of 8.3%, there are also less tax revenues to collect, which will ultimately impact the government’s balance of tax revenues and spending.
Ironically, while the U.S. is advising the eurozone countries to deal with their own European debt crisis (read “Global Economies Waving a Red Flag”), there is a growing and significant debt issue at home, but no one seems to want to discuss this.
I’m sure the pre-election talks will focus on the debt problem.
Spain has a national debt of around 712 billion euros, about US$892 billion or about US$19,391 per citizen. The European Central Bank’s (ECB) bond-purchasing program will help in the short term, but there needs to be a longer-term solution to deal with the financial crisis.
But while the economic situations in Spain, Italy, Greece, Portugal, and Ireland look bad, everyone seems to be somehow ignoring the massive $16.0 trillion of national debt in the U.S. That’s $50,921 per citizen, or more than double the debt of the Spaniards. The U.S. national debt is mounting and not going away anytime soon. Worst of all, it’s growing at an alarming rate every minute. The only plus here is the country’s low bond yields. If the U.S. had to pay out the high yields Spain does, the U.S. would be broke and facing a credit crisis.
This national debt will take decades to pay off or even get it to more manageable levels.
The reality … Read More
We are at the mid-point of the year, and so far it seems like a rollercoaster ride driven by heightened stock market risk. We had a stellar January, followed by some softness in February and March. April and May, followed by losses, but we saw some oversold buying in June. The key stock indices are still down from the end of the first quarter, and with many unknowns and stock market risk, it may likely be a rocky second half.
Taking a look at the mind of investors tells us the situation. Since May 15, there have only been five bullish investor sentiment days on the NYSE and seven on the NASDAQ. Compare this to the start of the year when each session in January and February saw bullish sentiment along with the majority of March. The second-quarter sentiment has been muted.
Not only do you have the European debt crisis dragging on in the eurozone, but China is stalling, and the U.S. economy, while growing, is relatively stagnant. Combined, it means high stock market risk.
Corporate America may struggle in the second-quarter earnings season to begin on Monday, which I discussed in “Don’t Expect Much from Second-quarter Earnings.”
There is also nearly $16.0 trillion in U.S. national debt and deficit levels, which adds to the stock market risk. California is nearly broke and many other states are trying to squeeze the coffers, looking for money. And while this is going on, you have about 13 million Americans looking for work and probably about 25 million Americans who are unemployed or underemployed.
We also have stock market … Read More
Many people have tuned out the European debt crisis and believe simply that another emergency meeting will be held in which nothing will be decided, allowing the eurozone to simply continue surviving as it has.
The problem with this line of thinking is that the unemployment rate and the economic recession continue to worsen in the eurozone, therefore prompting leaders to resolve the European debt crisis and get their citizens back to work instead of having them protest on the streets.
It is critical that something done very soon or there will be ramifications here in the U.S. as well. The eurozone could experience a banking crisis that will be worse than the Lehman crisis in 2008 and will lead to the European debt crisis reaching heights no one could ever imagine.
The best way to describe the situation is to use Portugal as an example. The debt and unemployment situation in Portugal is such that the country will most assuredly require another bailout from the eurozone.
Yet throughout this European debt crisis in 2012, there has been very little mention of Portugal. If its situation is just as bad as Spain’s, if not worse, then why hasn’t Portugal been in the headlines as the European debt crisis deepens?
The answer is that although Portugal will most likely require another bailout from the eurozone, the country does not need to roll its debt over until the first quarter of 2013. This is a very important concept to grasp, dear reader. It isn’t only the size of the debt that a nation carries that is critically important; when that debt … Read More
Hope springs eternal; many believe consumer spending will resume in 2012 as the jobs market improves, preventing the U.S. economy from entering a recession. But the hard evidence shows otherwise.
As the U.S. Senate and Congress are split between democrats and republicans, there are at least 15 job bills that have not been passed or that are still stalled, as the jobs market continues to deteriorate. (Source: LA Times, June 22, 2012.)
This stalemate is unlikely to resolve with the upcoming election so close. As the stalemate continues, 19.1% of college graduates under the age of 25 are in lower-paying jobs for which they are overqualified, while the overall youth unemployment rate in this country is 16.4%. (Source: USA Today, June 6, 2012.) These are the same graduates who are saddled with debt before they even enter the jobs market.
We can all agree that the prime working ages at which people buy homes, pay for children’s education, save for retirement and spend the most range from their 30s to their 60s.
As of May, 2012, there were 3.5 million people in this country between the ages of 45 and 64 who were unemployed, with a full 39% of them unemployed for more than one year. (Source: Wall Street Journal, June 23, 2012.) For as long as jobs market records have been kept, this level of unemployment among this group has never been this high.
It has been four years since the financial crisis began. The extraordinary length of time that the jobs market has experienced such sluggish growth means that more and more people have been … Read More
The eurozone is on shaky ground.
European Union leaders will be meeting on Thursday to begin an emergency two-day summit as the region’s leaders attempt to localize and corral the European debt crisis.
Spain has formally requested emergency funds to help save its fragile banking system. It is unknown how much cash Spain is asking for, but about USD$130 billion is available. The overriding concern is if Spain collapses, it would likely send a ripple effect beginning in the eurozone and spanning globally since Spain was the 12th largest economy in the world in 2011, according to the International Monetary Fund (IMF). Before, Spain’s economy was the 9th largest, but was surpassed by Russia, Canada, and India in 2011. Australia is now also looking to catch and surpass Spain. (Read why Spain is facing financial chaos in “Why Spain’s in for Some Hurt.”)
The yield on the 10-year Spanish bond hovered at 6.7% on Tuesday after recently trading over the critical 7.0% level. The yield has been on a steady upside move since trading around 5.0% in late February. This high yield is unsustainable and not payable by the government; Spain is broke so high financing costs are not desirable. Recall when Greece’s 10-year bond yield surpassed 7.0% and eventually was over 90.0% on fears of a country default before the IMF, European Central Bank, and European Commission came in with $146 billion in cash. Unfortunately, as we all know, it was not enough, as Greece had to ask for more funds just to make the debt payments on its initial loan.
In Greece, the situation remains unclear … Read More
It’s not enough we have to deal with the dire economic situation in the eurozone and Europe, but now bank stocks are under attack, especially from Moody’s Investors Service, which is negative on the banking sector. The quality of bank stocks has been improving, but clearly the credit rating agency is a bit on the cautious side and likely making up for not being tough enough with its ratings leading up to the credit crisis in 2008 that drove the global economies into a recession.
The European debt crisis led Moody’s to downgrade 16 Spanish banks, seven German banks, and three Austrian banks. As you know, the situation in the eurozone is a mess and will worsen, especially if the global economies stall, which I discussed in “Europe’s Meltdown: The World’s Economies You’ll Want to Keep on Your Radar.”
Moody’s is also growing a bit wary about the big U.S. bank stocks, especially given their continued appetite for risk in trying to attain profits. The big money for banks lies with investment banking and trading, and not personal and commercial banking. A bank can make billions from a single high-gamble trade. Could you imagine how long it would take to make this from fees for retail banking? This is the reason why many of the bigger bank stocks continue to trade speculatively despite the establishment of the Volcker Rule proposed by economist and ex-Fed Chairman Paul Volcker to restrict some speculative activities. The reality is that a bank must satisfy its shareholders.
What Moody’s has done is classify the big banks into three categories from the top banks … Read More
The only way the European debt crisis could be put temporarily aside is if the European Central Bank (the “ECB,” our equivalent of the Federal Reserve) prints money. Since Germany is the main voice within the ECB, printing is not the solution, because Germany is refusing outright. This means the European debt crisis continues to escalate on a daily basis.
The German Council of Economic Experts has developed a creative way around the European debt crisis. They call their proposal the “European Redemption Pact” (source: The Telegraph, May 29, 2012).
Under the proposal, a certain percentage of a troubled eurozone country’s public debt would qualify to be placed in a special fund. From this fund, Germany would issue joint debt, so that the country would enjoy the low interest rates paid by the stronger northern countries of the European Union.
To back this debt, Germany is asking that these countries put up 20% collateral. The concept, dear reader, is similar to that of a bank; they will be more than happy to provide you with a loan if you have assets they can seize, just in case you don’t pay.
The assets Germany wants from these countries is either their foreign currency reserves—like U.S. Treasuries or gold bullion.
Now, this is not the first time that stronger eurozone countries have offered to help countries like Greece, Spain and Italy during the European debt crisis. China and Britain offered to provide money to these countries in exchange for their gold bullion. These countries flat out refused, opting instead to hold … Read More
Spain has an unemployment rate of 25%, which is startling given the dire financial condition of the ninth largest economy in the world and the fact it’s in its second recession in three years. Even worse, the youth unemployment rate is a staggering 51%. No jobs translate into less spending. Retail sales in Spain plummeted 9.8% in April, according to the National Statistics Institute. The decline represented 22 straight months of contraction. The retail picture also looks somewhat cloudy in the U.S., which I discussed in Retail Picture Remains Cloudy. (PC051012)
The massive reduction in spending means stagnant economic growth, which in turn translates into less tax revenue for the government at a time when the national debt is 712 billion euros or about $892 billion. That’s about $19,391 per citizen. Now the Spaniards need to deal with the country’s debt and muted growth; but, compared to the situation in the U.S., it doesn’t look that bad. The U.S. has nearly $16.0 trillion in debt or $50,101 per citizen. That’s huge and we all realize the financial mess the U.S. is in, but then that’s another story.
The reality is that Spain is critical to the eurozone in terms of its size and importance in the region’s economic engine. If Spain fails, as was the case with Greece, the aftershocks will likely be significant not only to the eurozone, but also the global economies, including China, which is Spain’s sixth largest trading partner since relations started in 1973. The European debt crisis and muted growth in the eurozone have impacted China and in turn the Asia-Pacific region. Lower consumption in … Read More
The debt and growth problems in the eurozone continue to dominate the headlines. The eurozone countries are looking at the impact of Greece exiting the 17-country eurozone. Greece can’t even elect a coalition government to deal with the austerity measures.
Now there’s news that the eurozone is continuing to slide. Not really a surprise. The eurozone composite Purchasing Managers’ Index (PMI) contracted to 45.9 in May, the lowest level since June 2009, and below the 46.7 reading in April. It was also the ninth time the PMI was below the neutral 50 level since June 2009. The reading clearly indicates that growth will be challenged.
France is stalling. Germany, the largest and most influential country in Europe, expanded at a muted 0.5% in the first quarter. Moreover, declining inventories suggest less demand for goods. The problem is that the weakened countries of Germany and France are not conducive to economic recovery in the eurozone. You will discover over time that this is true.
My concern is that the fragility of the eurozone impacts the global economies that trade with the region. The 27-nation European Union is clearly feeling the pinch. Britain just entered its second recession since the financial crisis in 2008, impacted by the sluggishness in the eurozone. Britain saw its gross domestic product (GDP) contract 0.3% in the first quarter following a 0.2% decline in the fourth quarter. The country continues to face budgetary concerns and, without higher exports to drive revenue income, Britain will continue to face hardship this year and into 2013.
Tax increases and government spending cuts in the U.S. are set to take place on January 1, 2013.
Originally, the purpose of the payroll tax cuts was to stimulate the U.S. economy; government spending programs (like extending unemployment benefits) were also aimed at getting the economic recovery going.
The tax cuts and government spending initiatives that were enacted to help the economy “rebound” from the crisis and recession of 2007 add up to roughly $433 billion, or approximately 2.9% of U.S. gross domestic product (GDP) (source: Bloomberg).
If GDP growth is expected to be in the two-percent range in 2013 and we subtract 2.9% from it, then we automatically get a recession number of -0.9% for GDP growth.
As we get closer to the U.S. Presidential election and to the first day of 2013, the press has paid closer attention to the tax cuts and government spending initiatives being reversed, because of the recession implications…so much so that January 1, 2013, is now being referred to as the “fiscal cliff.”
Just this week, the U.S. Congressional Budget Office (CBO) put out a note stating that Congress needs to address the fiscal cliff or the U.S. economy could be in a recession in the first part of 2013.
Of course, the issue will most likely not be addressed until right after the election, giving Congress very little time to act. (It might not matter anyway; a recession-plagued Europe, a slowing Chinese economy, and a slowing U.S. economy might put us in recession before 2013). (See: Economic Growth in the Second Half of 2012 to Deteriorate.)… Read More
Like a household selling its personal belongings to pay its debt, some eurozone countries are leasing their historic sites to pay their debts.
I have been writing about the European debt crisis. Besides the unemployment rates being at elevated levels in the eurozone, many southern eurozone countries have such high debt levels that they are literally running out of money.
To pay down some of the debt and to prevent from defaulting on their debts, Greece is thinking of selling its islands.
While Greece hopes to hold on to its national treasures and what made the country what it is today, another southern eurozone country is going the leasing route.
In the eurozone country of Italy, the government of Sardinia is initiating a program to create 30-year leases to interested investors who would like to restore and create exclusive hotels and resorts with the country’s historic lighthouses (source: The Telegraph, May 23, 2012).
There are 15 such picturesque lighthouses nestled in coves overlooking some of Sardinia’s major tourist areas and some of the most beautiful ocean and beaches in the world.
The government does not have the money to restore these sites, and since they are only accessible by boat, they have been left abandoned; the problems of the eurozone taking precedence.
However, one Italian businessman finally convinced the government of Sardinia to lease one lighthouse to him. The businessman pays the government rent, which helps the government pay its debts to the eurozone.
Not only did the businessman restore one lighthouse, but he also converted it into a hotel where tourists feel like they have their own little … Read More
With the Greek unemployment rate at a record 21.7% in February and youth unemployment at an alarming 54%, the elections in Greece held earlier in May saw this 60-year political cycle come to an abrupt end.
The parties that support the European Union and the austerity measures—and the parties that traditionally held power for over 60 years—only garnered 34% of the vote. The other minority extreme right-wing and left-wing parties, which gained seats as a consequence, stand against the European Union and the austerity measures.
Greek law states that the minority party with the most votes must attempt to form a coalition government in order to run the country. The party in support of the European Union and the austerity measures was, of course, unsuccessful in forming a coalition government.
According to Greek law, the party with the second-most votes is next to try to form a coalition government. Although these extreme parties are against the European Union and the austerity measures, their ideals are so different that they were unable to form a coalition.
Now that this has failed, Greek law states that another election must be held in the hopes of finding a majority government. This new election should take place sometime in mid-June. Of course, there is no way that the pro-European Union groups will get elected. The question is: will the people of Greece provide either the more extreme left- or right-wing parties with enough seats to run the country?
The … Read More
When the competitors of Cisco Systems, Inc. (NASDAQ/CSCO) reported weaker first-quarter 2012 earnings, market participants bid up Cisco’s stock believing that Cisco was taking market share away from its competitors.
Polycom, Inc. (NASDAQ/PLCM), a videoconferencing company, reported weaker first-quarter earnings. This competitor to Cisco noted that lower government spending caused revenues to decline more sharply than anticipated.
The company also provided its earnings outlook for 2012. It noted that the economic landscape looked weak. It cited business in North America and in Asia as being weak. This earnings outlook flies in the face of those who say that the U.S. economy will remain strong, despite what the rest of the world is doing.
Juniper Networks, Inc. (NYSE/JNPR) is a major communications equipment maker, the main competitor of which is Cisco Systems. Juniper’s earnings outlook for 2012 was provided with a very cautious tone. The company believes that the slowing U.S. economy and the European debt crisis are preventing telecommunications companies from spending, which in turn will affect its bottom line.
Many traders thought it is easy to blame a weak U.S. economy and the European debt crisis on a weak earnings outlook when Cisco is taking market share.
Cisco System reported earnings last week, which were fine, but its earnings outlook for 2012 painted the picture of a very nervous business sector that was unwilling to spend on Internet gear and a weaker global economic environment.
Despite the cash large corporations have on their balance sheets, they are not spending. Cisco noted that the European debt crisis not only meant weaker consumer and business spending in Europe, but it is … Read More
Profit Confidential — IT'S FREE!
"A Golden Opportunity for Stock Market Investors"