Wednesday, May 9, 2012 – Greek Government, Spanish Banks, Gold Prices – It’s All Messy

DOW – 97 = 12,835
SPX – 9 = 1354
NAS – 11 = 2934
10 YR YLD unch = 1.84%
OIL – .56 = 96.45
GOLD – 15.40 = 1590.40
SILV – .20 = 29.37
PLAT – 12.00 = 1505.00
The Greek tragedy continues; no success so far in negotiations to form a coalition government after weekend elections resulted in a deadlock. It looks like there might be another election in June. The Greeks accepted another $5 billion dollar bailout payment today, so they keep the government afloat for a few more weeks. Now, the chatter is shifting to the very real idea that Greece will exit the Euro, and trying to figure out the implications. The concern is that exiting the Eurozone is going to be impossible and possibly will trigger a cascade of bad economic consequences. Absolutely right, but only because it might be done in an uncontrolled manner.
The Federal Reserve and the ECB and the IMF and all the others have been saying that the Euro-crisis is under control. If, or when Greece exits the Euro, nobody should be surprised; this train has been rolling down the track for a couple of years, and the Germans and ECB and IMF and Fed all had plenty of time to come up with solutions. And they didn’t. So, now the Greek voters have come up with a solution. They didn’t come up with a unanimous decision, not even a plurality. The whole thing was a crazy mish-mash of votes, ranging from communists to neo-nazis. Sometimes democracy is messy, but it looks like it has produced a solution in Greece.
Spain took over Bankia, the country’s fourth biggest lender. In a deal that will give the state a 45 percent indirect stake in Bankia, the government will take control of its parent company BFA by converting into equity a 4.5 billion euro loan it had given the financial group previously. The economy ministry pledged to do all it takes to clean up Bankia, which has more than 30 billion euros of exposure to troubled loans to property developers and repossessed land and buildings. The government is expected to lend or give Bankia up to 10 billion euros in additional aid and it is widely expected that the bank will need more.
Since the banking crisis began, Spain has bailed out seven smaller savings banks, but the Bankia rescue is by far the biggest and it comes after a string of other banking reform plans revealed over the past week. These include moving toxic assets out of some banks and demanding that banks set aside 35 billion euros against loans to the building sector, on top of 54 billion euros the banks are already provisioning.
Prime Minister Mariano Rajoy had promised not to use state funds to rescue the banks, but mounting doubts over Bankia had shaken the euro zone and he did a U-turn. And if you’re wondering why voters in France voted the way they voted, or why the voters in Greece went to such extremes. Here is the answer. Spain demands austerity from its citizens and then bails out the banks. The politicians promise they won’t bail out the banks and it’s just a lie. Where does all the money go? To the banks.
As concerns about Spanish banks grow, there are warning that Europe’s banking system urgently needs to be overhauled, otherwise the entire monetary union could be in jeopardy. The continent’s leaders missed their chance to reform the system in the wake of the 2008 financial crisis, and are now paying the price. At a press conference last week, ECB President Mario Draghi admitted the temporary European Financial Stability Facility (EFSF, also known as the Euro Fubar Slush Fund), the rescue fund for cash-strapped euro-zone countries, has not been very successful Draghi said: “Its functioning fell short of both expectations and needs.” He did not say exactly what is wrong with the fund and what needs to be changed. He failed to mention that the ECB has long been exploring ways of expanding the scope of the EFSF, or its permanent successor, the European Stability Mechanism (ESM, also known as the Euro Slush Mechanism), to give the bailout mechanism more firepower.
Spanish banks are particularly unsteady. They are sitting on roughly 1 trillion-euro ($1.3 trillion) in shaky loans related to the ailing real estate sector. The estimates for the cash shortfall range from 50 billion-euro to 200 billion-euro. The German government wants to prevent the bailing out of Spanish banks from setting a precedent. Bailing out German banks at the taxpayers’ expense has already not been particularly popular. What’s more, it would hardly end with bailouts for Spanish banks. Ireland, which only had to be bailed out by the rescue fund because of its banks, and thus has a much higher level of government debt than Spain, could insist on equal treatment.
So, after all this time, nobody wants to bailout the banks, and yet, nobody has a better idea. Well, nobody but the Greeks.
Moody’s Investors Service will this month start cutting the credit ratings of more than 100 banks, a move that risks pushing up their funding costs and probably curbing lending. BNP Paribas, France’s biggest lender, Deutsche Bank, Germany’s largest, and New York-based Morgan Stanley are among firms that face having their short- and long-term debt downgraded to their lowest-ever levels by Moody’s.
The cuts follow downgrades by Standard & Poor’s and Fitch Ratings last year; and the fear is the cuts could erode profits, trigger margin calls and leave some firms unable to borrow from money market funds that have strict rules on who they can lend to. Without access to funding from private sources, banks have had to sell assets and reduce lending. I’d like to say the views of the rating agencies don’t matter anymore but, unfortunately, they do.
The Federal Reserve has for the first time given approval for a large Chinese bank to purchase a US bank. It also gave approval to two other large Chinese banks to expand their operations in the United States.
The Fed approved the application of the Industrial and Commerce Bank of China Limited, China’s largest bank, and two other Chinese firms to purchase The Bank of East Asia U.S.A., located in New York City. The Fed also approved an application by the Bank of China to set up a branch in Chicago and an application by the Agricultural Bank of China Limited to establish a branch in New York City.
It’s tough to beat the kind of year Exxon Mobil had in 2011. Shares rose by 20% and profits surged by 35% to $41.1 billion. Revenues jumped 28% to $452.9 billion, helping Exxon reclaim the top spot in the Fortune 500. Wal-Mart slipped to No. 2 in the Fortune 500 in 2011 after holding onto the top spot for two years in a row. The retailer was forced to aggressively cut prices to reverse its declining same store sales in the U.S. That helped push revenues up by 6% during 2011, to $447 billion, but it hurt Wal-Mart’s bottom line — profits declined by 4.6% during the year, to $15.7 billion.
Gold prices have been trading lower this week and futures prices hit a 17 week low this morning before recovering through the trading session. It is becoming apparent that Greece will have a difficult time remaining in the Euro-Union. And many people are more worried about Spain than Greece. The US dollar index has benefited recently on safe-haven demand due to the EU situation. The dollar may have problems but it is the cleanest shirt in a hamper full of dirty laundry. The lower prices have spread through the commodities markets, not just precious metals; it appears to be part of a risk-off response to the European Union debt and financial crisis. Crude oil hit a four and a half month low on Monday, and traded lower today; over the past five sessions, oil is down about 10%. As recently as last month, ever higher crude oil prices and $5 a gallon gas were still regarded as possible. Since then gas prices have dropped to levels much lower than they were a year ago.
Back to the metals; why isn’t gold performing as a safe-haven investment? Consider that the metals are a measure of how well the currency is being managed. Right now the US dollar is being reasonably well managed compared to other currencies; the cleanest shirt theory. With all the problems in Europe, it is fairly obvious that central banks are printing a whole bunch of currency in order to bail out banks and countries. The ECB and the IMF have already dished out about $2 trillion dollars in bailouts over the past six months, and there is almost certainly going to be more. And so, you’re probably wondering why gold isn’t selling for about $10,000 an ounce. And the answer is that gold and silver prices are manipulated. I’m not big into conspiracies, but seriously, if you were printing a currency would you want to see gold prices jump up to $5,000? And if gold hit $10,000 we would all be talking about the collapse of the dollar; we would all be talking about how Federal Reserve notes are nothing but counterfeit paper. We would all be crying about the failure of the Fed. And considering the relatively small market for gold and silver, it shouldn’t surprise anybody that the markets are manipulated. You should remember that the investment market for gold is quite small. Wal-Mart has a bigger market valuation than the entire market for gold.
Seriously, I’m not a conspiracy theorist. This is what the Fed does. They manipulate the amount of money in circulation. The M1 through whatever M amount; they have a printing press. They manipulate interest rates; every few weeks they have a meeting and then they announce how they decided to manipulate rates. In turn, they manipulate bonds and mortgages and all manner of debts. They manipulate stocks. We used to call it the Plunge Protection Team until we learned the real name, “The President’s Working Group on Financial Markets”. The price of oil is manipulated by use of the strategic reserves and cafe requirements on one side to out and out war on the other end of the scale. The government pays farmers to grow or not grow certain crops – which sounds like they manipulate the price of food. From time to time, the CME will change margins on the precious metal futures – that manipulates the price.
If you were going to have a major monetary easing in the near future, (like maybe if Greece exits the EU, or maybe at the June 19 FOMC meeting) if you were planning something that would devalue the dollar and run the risk of inflation – you would come out and say inflation is under control and you remain vigilant – you would suppress gold prices – and you wouldn’t tell people your real plans.
Why would you want to buy gold and silver if you know the prices are artificially low? Back to basic supply and demand. Think of it like a balloon being held under water. The price is being pushed down. And think of demand as the air that fills that balloon. Demand is currently expanding. Admittedly, the technical levels for gold are making holders nervous, but long term holders are probably looking at these prices as a chance to buy the dip.
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