Is European Crisis About To Set Off 2008 Type Market Sell-Off?

 Although the economic picture in the U.S. is less than rosy it is currently in much better shape than that of the European Union (EU).  I say this simply because the U.S. is not at threat of a credit crisis; granted, because we had ours in 2008.

What we really need to ask ourselves is how is my portfolio prepared for a European credit crisis?  Just like the U.S. credit crisis dragged down foreign markets, believe a European crisis will do the same to the U.S. markets, especially the financial sector. 

With recent debate over the need to aggressively ramp up the bailout fund of the European Financial Stability Facility in order to be prepared for bailout needs of EU members, the question is no longer when countries will need more bailout help but when?

Though Italy and Portugal’s financial troubles have come to the forefront recently, Greece still remains the main concern as the catalyst for a credit crisis.  Last Tuesday, the yield on one-year Greek government bills hit 60 percent, yes, you read that correctly 60 percent! 

Call me crazy but doesn’t it almost seem like Greece is borrowing from a loan shark, you know, at such a ridiculous rate that is basically impossible to service or ever pay down principal on.  The Greek debt to GDP ratio is already 140 percent and climbing, the writing may already be on the wall.

I plan to keep my eye on the coupon payments due Tuesday, September 20 for the Greek 4.5 percent 2037s and 4.6 percent 2040s.  The payment for both totals 769 million Euros.   An interesting coincidence is that the September 2011 credit default swaps (CDS) expire on the 21^st, therefore banks that have purchased insurance against a missed payment would be covered still and be paid out on that.

The real chances that Greece misses a payment is for anyone to guess, but something unpleasant will have to occur in order to progress towards a debt resolution.  Maybe the IMF will continue to provide bailout funds so that Greece can make payments, but is that a good thing for the markets?

With that said, how do we prepare our investment portfolios for a potential downward shock?  Well, remember that CASH is a position and it’s a position you may want to currently be in.  There are dozens of quality dividend paying stocks out there and there dividend yields are only going to go higher with any subsequent declines in the market.

Think about this; you can buy quality utility stocks that are paying a better yield than U.S. Treasuries.  If you buy them after large market sell-offs then possible price appreciation is now also in the mix

SIDENOTE:  As I finish up this letter news has just hit that the S&P ratings agency has downgraded Italy to A from A+.  Guess we should be watching more than Greece carefully after all.  It will be interesting to see how/if this impacts markets tomorrow morning.

GDP In Recession Zone

This week’s letter we will circle back to the latest year-over-year GDP numbers and the increasing evidence that a recession is near, if not already upon us.  However, we will also discuss gold; its merits for investment and whether we should look at it as an investment or rather as insurance.

As I have stated a few times previously (see prior letters for supporting chart) every time year-over-year GDP growth falls below 2 percent the U.S. economy falls into a recession.  Thus far, second quarter GDP is showing 1.6 percent growth.  See chart:

We still have a second a third estimate to go before the second quarter GDP numbers are final, but considering first quarter numbers were revised lower, not higher, we are likely not getting out of the woods.

If you recall, last letter we spoke about price to earnings ratios on stocks and how for every 0.5 percent drop in GDP roughly a $2 drop occurs in S&P earnings.  Based on the recent trend in GDP and the fact that the U.S. deficit continues to grow we are still a sizable selloff from where you will see me writing that stocks are cheap.  High yielding stocks, like those of utility companies, is where I'd rather be overweight while the next year and a half plays out.

Speaking of the ever growing U.S. deficit (the debt deal just slowed down the expansion of the deficit over the next 10 years, not cut it) it is clear that the fiscal policy of our leaders is yet to change, so that keeps gold very much in play.

There are two ways to look at gold; is it an investment or insurance?  The answer really depends on what you are trying to accomplish.  If you are putting a percentage of your portfolio in gold as a store of value or "safe haven" as many put then you want to buy physical gold, like gold coins for example.
This option is for those that are looking to protect (insure) there money against a weakening US dollar, which is due to the anti-dollar fiscal and monetary policy of our current government (QE and deficit spending).

If you are speculating on gold as an investment because you believe there will be further price appreciation then you want to look at the gold ETFs, such as GLD, or investing in the gold mining stocks.  We have previously reviewed the gold miners and how they have lagged the appreciation in physical gold over the last three years. (See May 30th letter for more detailed thoughts on gold miners).

I will be keeping my eye out for the July consumer credit data due out September 8^th.  Consumer spending is the key driver of our economy and this data helps us gauge if U.S. households are saving or racking up more debt, and which type of debt they may be taking on to make purchases.

Your hoping people are balancing their budgets better than Washington analyst,

Mitch Jaworki