Explaining Your Money

The Stress and Strain of a Bailout Euro down, Dollar up

2010-02-11T17:18:00.001-08:00

So the “euro area member states will take determined and coordinated action if needed to safeguard stability in the euro area as a whole.” That’s no surprise. The larger countries have the ability to save Greece and the euro, but do they have the ability or will to save the PIIGS and the euro? Who is next? It is humorous that the communiqué included the comment “The Greek government has not requested any financial support.” Most of us are unaware of what goes on behind the photo ops and the carefully scripted press releases.

Without any details, this vote of support sounds hollow. Germany and France may temporarily calm world concerns about Greece and the PIIGS. However, the play has just begun. We will probably see varying degrees of civil unrest in Greece with the EU demanding stiff restraint. Then we will see political unrest in some EU countries. They have problems enough without having to bailout another country with such self inflicted wounds. And the strains that will inevitably occur between EU nations will be kept behind closed doors. If not, the euro will take another hit. More bailouts, which may not be avoidable, will transfer more risk from the PIIGS to the EU and will further damage the euro. Foreign exchange traders will take every opportunity to profit from the resulting loss of credibility. So while there are not a lot of good reasons to buy the dollar, there are some good reasons to sell the euro. Will it reach parity with the US dollar?

And if commodity prices show some stability here, especially oil, watch the Canadian dollar. Canada holds huge oil and gas reserves and other resources: potash, metals, diamonds and grains. It has a strong banking system, a strong housing market and a more financially sound government.

The Trend Is Set: Dollar Up, Commodities Down

2010-02-11T05:08:00.001-08:00

It appears the market has set a new direction. Over the past few weeks stocks are down. The January effect? Bond prices are up. The dollar continues to rally against most currencies. Commodity prices are declining. These trends should not be ignored because they presage what is in store for the next few months.

China is withdrawing liquidity, which the west cannot afford to do. Yet China has been the one big economy responsible for rising commodity prices. Recent events in Europe reduce the Euro’s attractiveness as a reserve currency.

The strengthening US dollar will harm the US balance of trade and thus the economy. Was this not Obama’s great hope, increasing US exports? As the “peasants revolt” the US fiscal stimulus will have to be slowly withdrawn. That leaves monetary stimulus. Even with Bernanke’s jawboning, higher administered rates are a long way off.

Greece and Europe: A Deck of Cards About to Fold

2010-02-10T18:18:00.000-08:00

The plight of Greece is an embarrassment to the EU. Dare the “Big Boys” France and Germany admit that monetary union is a failure? Certainly if Greece still had the drachma the country would have seen a frequently devalued currency over the past year. That somewhat automatic mechanism would have brought high inflation to the population but at some point would have boosted exports and squeezed imports. Unfortunately, the currency mechanism has been severely muted because Greece is only 3% of Euro zone GDP. Probably the best answer to this problem is IMF assistance. But that makes France and Germany look like deadbeats as well.

And even those countries outside the monetary union should be concerned with a Greek or worse yet, a PIIGS default. I pondered the question recently as to who purchased that latest Greek bond issue. What financial institutions outside of Greece own other Greek bond obligations? Yes, of course, there are numerous non-Greek banks that are owed money. According to an article in today’s London Telegraph, the “UK banks are exposed to these countries” (the PIIGS) “to the tune of 16 per cent of gross domestic product.”

What is even more concerning is that not only do French banks have a 30 % GDP exposure to the PIIGS, but that Irish banks have a 34% exposure and Portuguese banks have a 24% exposure. Can we expect the PIIGS to bail out their own banks?.. not very likely

Think Again About Commodities Investments!

2010-02-09T14:28:00.000-08:00

National Post - Andrea Bell

http://network.nationalpost.com/np/blogs/fpposted/archive/2010/02/09/think-again-about-commodities-investments.aspx

Barack Obama, a One Term President

2010-02-09T13:57:00.000-08:00

Quoting Charles Krauthammer, “don’t the Democrats see that clinging to this agenda will march them over a cliff?”...and the current president is leading the way.

It is surprising to see a president who appeared to be connected to the “average worker” now seemingly out of touch. The priorities of the American people have changed. This disconnect will be his downfall.

It could be inexperience on Obama’s part or it could be his advisors. But if he is unable to push his agenda through with a majority in Congress, how will he be able to succeed after the mid-term elections? The makeup of Congress is going to move against him and he will ultimately be seen as the president who was all talk and little action.

The Great Peasant Revolt of 2010

2010-02-09T07:04:00.000-08:00

National Post Editor - Charles Krauthammer

http://network.nationalpost.com/np/blogs/fullcomment/archive/2010/02/09/charles-krauthammer-the-great-peasant-revolt-of-2010.aspx

Three Major Currencies: Dollar, Euro & Gold

2010-02-08T17:40:00.000-08:00

by Jim Sinclair
Commodity Online

http://www.commodityonline.com/news/Three-major-currencies-dollar-euro-and-gold-25504-3-1.html

Europe Could Face Years-Long Debt Grind

2010-02-08T17:37:00.000-08:00

by Elena Becatoros and Carlo Piovano
Report on Business - Economy
http://www.theglobeandmail.com/report-on-business/economy/europe-could-face-years-long-debt-grind/article1460310/

Recovery Tetters as Debt Threat Spreads - Barrie McKenna Report on Business

2010-02-08T17:31:00.000-08:00

http://www.theglobeandmail.com/report-on-business/economy/recovery-teeters-as-debt-threat-spreads/article1458282/

Stock Fraud Newswire - a resource

2010-02-06T07:34:00.000-08:00

Stock Fraud Newswire - Resource for those interested in Stock Fraud. Find information regarding all the stock brokerages involved in the stock Fraud Claim including: Goldman Sachs, Lehman Brothers, J.P. Morgan Chase, and all others. Access our latest tools and information.

How to hedge your security position

2010-02-05T16:25:00.000-08:00

(Read Chevreau’s Comments About the New ETFs)

ETFs are a great way to hedge your security positions, or just to take an open position. Unless you are trading a specific commodity, they are a much better way of taking a diversified approach to markets than
through mutual funds, e.g. much lower MERs. As well, they are instantly liquid and can be traded daily if not intraday. I view them as something that must be traded since their longer term relationship to the commodity or basket of stocks will not remain constant. Also, keep in mind that C$ ETFs will change in price due to currency movement when the underlying security is priced in other than C$s, such as oil. ETFs are a great opportunity to make money. But be sure you understand what you are buying!

Does Claire Sibonney also know where commodity prices are going?

2010-02-04T15:10:00.000-08:00

It appears she does, especially oil! She must also be confident in where interest rates are going and what other things will influence the C$’s value. She seems to think that a 1 cent up move over par has more...
impact than a 1 cent up move under par, because she says any move over par isn’t likely to last.

What could be the difference to an importer or exporter? Will a move from 96 cents to 97 cents be more harmful than from 1.00 to 101.00? “But any incursion above the US dollar may not last long, because a strong domestic currency will only make it harder for Canada to compete on the world stage.” Is there some magic with par? Let’s face it, the Canadian dollar has been strong, is strong and will probably continue to be strong, hurting our manufactured exports in particular.

I’ve never seen anyone put a trading range on a currency’s value unless it was wide enough to drive a truck through it.

Is Geithner a Lame Duck?

2010-02-04T15:05:00.000-08:00

What was Geithner’s involvement in the Wall Street bailouts of 2008? Why was Lehman Bros. the only big “Wall Street firm” allowed to fail? The revelations to come mean the end of Tim Geithner ...
as Treasury Secretary. The Obama Administration knows the truth and Geithner is slowly being ushered out.

As with many political decisions, the timing of such actions must be handled “sensitively.” So while Mr.Geithner will remain S.T. for now, his days are numbered.

Is the Housing Decline Really Over in the U.S. and Elsewhere?

2010-02-03T16:43:00.000-08:00

Have a look at Barrie McKenna’s article regarding the TARP Watchdog. With continuing high unemployment and more mortgage resets this year, it isn’t likely that the American house price decline is over. It’s momentarily stabilized. Compounding the situation is the ever present risk-taking culture of Wall Street. Traders, lending officers and management are hired to take on risk. Without it, they could not afford ...
to pay out the big bonuses they normally pay out. Often the traders win and all is well. But with the U.S. government standing in the wings to bail out the “big guys”, who is assuming the risk?

Another financial crisis may be brewing. This time it won’t be based on mortgage backed securities but something else. Will the U.S. government have the willingness and ability to bail out those too large to fail, again?

What will another banking shock do to house prices?

Was the Latest Greek Bond Issue Really a Show of Confidence?

2010-02-02T18:01:00.000-08:00

Maybe the “successful” Greek Bond issue last week was successful only because it raised 5 billion euros. But the five year issue cost 350 basis points over the risk free mid swaps rate. This compares with 225 points ten months ago. And the question is; who purchased the bonds?
How many of the various government agencies across Europe provided a helping hand?

It is very unlikely the European Community would want to be seen bailing out any of its weaker members. However, it is even more unlikely that it would permit any member to go into default and the destabilization of the monetary union. We all remember what happened when a New York financial institution fell in 2008.

We All Have Foreign Currency Risk. Do You Know What Yours Is?

2010-02-02T17:02:00.001-08:00

As Canadians, we are all aware of how the value of the US Dollar can impact a winter vacation south of the border. But are you aware of the foreign currency exposure in your portfolio? Since the elimination of the foreign content rules in our RRSPs, Canadians have...
moved to greater diversification in their investments, not only to the capital markets in the USA, but also to markets in Europe, Brazil, China, India and beyond. When you buy a stock, bond, Treasury bill or mutual fund outside Canada, you are buying an asset in a foreign currency. Not only are you exposed to stock or bond price fluctuations, but you are exposed to currency fluctuations. Do you need to become a “currency trader”? As with all assets in your portfolio, you should understand the exposure you have to risk and make an informed decision as to the level of risk you are willing to accept.

Let’s take a look at what happened in three markets last year and then what risk exposure you may have beyond those markets. In 2009 the TSX Composite rose about 34% and the Standard and Poor 500 in New York rose about 26%. The Canadian dollar rose from 81.53 cents US to 94.90 cents US or about 17% according to Bank of Canada statistics. For Canadians who held US dollar stocks, they had a good return in 2009 in US dollars. However, on a Canadian dollar basis the loss of 17% on the currency made the US returns look tiny in comparison to the TSX returns. Conversely, an American investor who owned Canadian stocks would have received an eye popping return of over 50% in US dollars! Since most Canadians’ expenditures are in Canadian dollars, you should be aware of how currency fluctuations can increase or decrease the value of your portfolio.

Are you an investor in Europe or the developing countries? Do you know what risk exposure you have to the markets in China, Brazil or India? All currency prices fluctuate just as stock prices do. However, some currencies are “pegged”, while others are not. As with stocks, there is a good time to buy and a good time to sell. Be aware of this other variable.

When you see international headlines concerning the finances of a country, take note. For example, Portugal, Ireland, Italy, Greece and Spain (the PIIGS) have grabbed international attention due to their large budgetary deficits. Each of them is part of the “Euro Zone”. Could their difficulties affect the value of the euro in relation to the Canadian dollar? Yes they could. However, because the economies and financial accounts of Germany, France and others are in better shape than the PIIGS, those economies will help to maintain the euro’s value. Continue to watch as the government of Greece in particular, tries to resolve its budgetary problems and how the people of Greece respond.