Is Greece about to leave the Euro? The ongoing speculations will dominate this week and therefore we might see investors running away from risky assets again this week.
Senior Strategist Ib Fredslund Madsen with his take on the markets this week.
Video courtesy of en.jyskebank.tv
It’s a peculiar sort of problem when your economy grows at 8.1% in the first quarter and yet talk abounds of a “hard landing.” American and Europeans haven’t seen that kind of growth in decades—and they could desperately use it today. Yet such is life is China; after years of growing at a blistering pace, growth of “only” 8.1% represents a slowdown.
The 8% mark is considered by many to be the minimum growth rate that China needs to maintain high employment and to keep living standards rising. And by the government’s own calculations, Chinese growth will likely slip below that level for the full year 2012. Citing weakness in China’s European export markets and lower construction spending, the Chinese government lowered their full-year target to 7.5%.
The Chinese government doesn’t take its own GDP numbers seriously (they know the numbers are baked), and neither should we. But other statistics are even more sobering.
Consider the tepid growth in imports. China’s imports grew by a pitiful 0.3% in April, compared to an average growth rate of 25% throughout 2011. It is no shock that this has coincided with a general sell-off in commodities prices. More on that shortly.
Let’s take a look at what China’s leaders themselves find important. Li Keqiang, China’s heir apparent as premier, let on that he watches three indicators to gauge the direction of the Chinese economy (see his comments): electricity consumption, rail cargo, and bank lending. None tells a particularly optimistic story.
Electricity consumption grew by just 0.7% last month vs. 7.2% the month before. Growth in rail cargo volume has been cut in half. And bank lending? With the government actively trying to deflate a housing and construction bubble, it has slowed dramatically.
Now that I’ve bombarded you with scare statistics, how should we react as investors?
First, step back and try to keep perspective. Yes, there is a steady stream of bad news coming out of China that signals slow growth ahead. But “slow growth” is clearly a relative term when your economy is growing at a 7-8% clip.
China’s leadership are not fools, and they realize that the model that has served them so well in recent decades—manufacturing cheaply and exporting to the West—is broken. It’s hard to find success as an export-driven economy when the buyers of your products are grappling with a crippling debt crisis.
Realizing this, China’s leadership indicated earlier this year that “the key to solving the problems of imbalanced, uncoordinated, unsustainable development [in China] is to accelerate the transformation of the pattern of economic development. This is both a long-term task and our most pressing task at present.”
In other words, it is the stated objective of the Chinese government to deemphasize investment and instead boost domestic consumption.
Investors wanting to profit from the reorientation of China can follow two trends:
Consider what the Economist has to say about China’s demand for luxury:
More than half of this year’s growth in luxury goods will come from China, where sales are set to soar by 24% in 2012. The country is already the largest market for jewellery after America, and for gold after India, and is gaining fast on both leaders. Prada and Gucci owe a third of their global sales to the rich in China. CTF saw same-store sales on the mainland shoot up by 45% from April to September last year. See “Riding the Gilded Tiger”
According to the Financial Times, emerging markets account for 40% of all luxury sales (up from 27% as recently as 2007), and this does not include wealthy emerging market tourists who buy in the shops of New York or London. Again, according to the Financial Times, as much as half of the luxury sales in Europe are to emerging-market tourists, many of whom hail from China.
This week Richemont, owner of the Cartier brand (among many others) and the world’s second largest luxury retailer by sales, announced that sales and profits rose 29% and 43%, respectively, largely on strong demand from China. Perhaps surprisingly, demand in Europe was robust, with sales up 20%. Crisis or not, it would appear that well-heeled consumers are spending freely on life’s frivolities.
The crisis in Europe has make the luxury goods sector all the more interesting. Most of the biggest names in high-end luxury goods are European firms, and with the Eurozone mired in crisis we’re getting buying opportunities we might not see again for a long time.
One of my favorites is French luxury conglomerate LVMH ($LVMUY), the maker of Louis Vuitton handbags, Dom Perignon champagne, and many other delightful goodies. Mercedes-Benz manufacturer Daimler AG ($DDAIF) is also an excellent play on Chinese growth. China is the biggest market for the Mercedes S-class and the biggest engine of the company’s growth.
Investors wanting to stay closer to home could consider Beam, Inc. ($BEAM), the distiller or Jim Beam Maker’s Mark bourbon whiskies and Skinnygirl cocktails among others. Beam is a smaller rival to international spirits juggernaut Diageo ($DEO), and its brands lack some of Diageo’s cachet. Still, Beam is attractive as a recent spinoff from Fortune Brands, and it stands to grow at a significantly faster pace in the years ahead. I consider both excellent holdings for the next 12-24 months.
Disclosures: LVMUY, DDAIF, DEO and BEAM are held by Sizemore Capital clients.
Video courtesy of ForexCT – A leading Australian forex broker, liscensed by the Australian Securities & Investments Commission, offers the MetaTrader4 and PROfit Platform to retail traders. Other services include Segregated Accounts, Trading workshops, Tutorials, and Commodities trading.
Source: ForexYard
Following weeks of speculation regarding how Facebook’s debut on the New York Stock Exchange would turn out, investors were mildly disappointed with the social media site’s performance on Friday night. Facebook closed out the week at 37.96, slightly below its opening price. What direction Facebook takes from here is a hotly debated topic among market analysts. Some are warning that the site may be overvalued already, and Friday’s disappointing performance could be a sign of things to come. That being said, any moves by Facebook to expand its already massive subscribership could generate excitement in the marketplace which could help boost the value of this site.
The US dollar turned bearish against most of its main currency rivals on Friday, as investor concerns regarding the political situation in Greece have begun to stabilize. A recent Greek poll found growing support for one of the political parties that favor Greece remaining in the European Union. As a result, the EUR/USD came off its recent four-month low to gain well over 100 pips before closing out the week at 1.2776. Against the British pound, the greenback was down close to 95 pips. The GBP/USD finished Friday’s trading session at 1.5818.
This week, traders will want to pay attention to several potentially significant US economic indicators. The Existing Home Sales and New Home Sales figure, scheduled for Tuesday and Wednesday, respectively, are forecasted to show growth in the US real estate sector. If true, the dollar could see gains against the Japanese yen. In addition, Thursday’s Core Durable Goods Orders and Unemployment Claims figures may generate volatility in the marketplace, with any better than expected data likely to give the dollar a boost.
The euro bounced back from recent lows against its safe-haven currency rivals on Friday, as investor fears regarding the Greek political crisis have begun to subside. Furthermore, the euro received a boost as investors expected world leaders to express their support for the euro at the weekend’s G8 summit. In addition to the 135 pip gain against the US dollar, the euro was up over 80 pips vs. the Japanese yen. The EUR/JPY closed out Friday’s trading session at 100.94. Against the British pound, the euro was up 50 pips for the day while the EUR/AUD closed out the week up over 150 pips.
Turning to this week, analysts are warning traders that it may be difficult for the euro to sustain Friday’s gains. With so many uncertainties remaining in Greece, not to mention the potential impact the current situation could have on other euro-zone countries, investors remain cautious about placing their funds with higher-yielding currencies. That being said, attention should be given to Thursday’s French and German Flash Services and Manufacturing PMI’s. As the two biggest economies in the euro-zone, indicators out of France and Germany tend to have a significant impact on the common currency. Any positive results could lead to euro gains.
After recently falling to a four-month low, gold extended its bullish trend for a second consecutive day on Friday. The precious metal was up over $20 an ounce to close out the week at $1592.56. Investor fears regarding the Greek political crisis have calmed in recent days which has helped boost demand for precious metals. Friday’s gains helped give gold its strongest week in over a month.
Whether gold is able to maintain its current upward momentum this week will largely depend on euro-zone news. Any signs that anti-austerity political parties could be victorious in next month’s Greek elections may renew fears that the country will have to exit the euro-zone. This may lead to renewed risk aversion in the marketplace which could drive the price of gold down.
Decreased demand for oil in the United States, combined with poor global fundamental indicators resulted in another bearish trading session for crude oil on Friday. Crude was down just over $1.50 a barrel for the day, hitting $90.91 before staging a slight upward correction to close the week at $91.29. Friday’s losses brought the price of oil down to a six-month low.
Turning to this week, the direction oil takes will largely be dependent on euro-zone news. Despite small positive signs last week that Greece will stay in the euro-zone, the situation in the region is still extremely fragile. In addition, debt worries in Spain also have the potential to generate significant market volatility. Any negative news out of Europe may weigh heavily on commodities, which could result in crude oil extending its recent losses.
The MACD/OsMA on the weekly chart has formed a bullish cross, indicating that this pair could see an upward correction in the coming days. This theory is supported by the Williams Percent Range on the same chart, which has dropped into oversold territory. Going long may be the wise choice for this pair.
Most long term technical indicators show this pair range-trading, meaning a definitive trend is difficult to determine at this time. Traders will want to keep an eye on the Relative Strength Index on the daily chart, as it is close to dropping into oversold territory. Should the indicator drop below the 30 line, it may be a sign of an impending upward correction.
The weekly chart’s Williams Percent Range has crossed over into oversold territory, indicating that this pair could see upward movement in the coming days. Additionally, the MACD/OsMA on the daily chart has formed a bullish cross. Opening long positions may be the wise choice for this pair.
The weekly chart’s MACD/OsMA has formed a bearish cross, indicating that a downward correction could occur in the near future. Furthermore, the same chart’s Williams Percent Range has drifted into overbought territory. Traders may want to open short positions ahead of possible downward movement.
The daily chart’s Slow Stochastic has formed a bearish cross, indicating that this pair could see downward movement in the near future. Furthermore, the Williams Percent Range on the same chart has drifted into oversold territory. Forex traders may want to go short in their positions ahead of a possible downward breach.
Forex Market Analysis provided by ForexYard.
© 2006 by FxYard Ltd
Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.
Charles Sizemore, editor of the Sizemore Investment Letter, discusses the ins and outs of dividend investing with Joe Clark on Consider This radio.
To hear the interview, follow this link.
Consider This With Big Joe Clark is a show designed to provide every day people with real, useful information that can be translated into daily life and thought. Each week Joe covers a different aspect of financial planning, retirement options, and current economic conditions in common sense language that everyone can understand. To find out more about the show, please visit the Financial Enhancement Group’s site.
Joseph A. Clark, CFP, RFC – Big Joe, a Certified Financial Planner (CFP) and Registered Financial Consultant (RFC), has been in the financial services industry for more than 20 years. He is the managing partner of Financial Enhancement Group, LLC, a Hoosier-based financial services company with offices in Anderson, Lafayette, Indianapolis and Rensselaer. Joe is also a teacher, he began teaching a financial capstone class for the Financial Counseling and Planning students at Purdue University in the fall of 2008.
By TraderVox.com
Tradervox (Dublin) – Large speculators in the market are showing concerns that the euro will decline against the dollar as the region prepares for a possible Greece exit. The net shorts or bearish bet rose 143,984 to 173,869 last week. Analysts are saying that the market is reacting to the reality of contagion into Spain which will continue as long as negativity about Greece continues. Signs have already emerged after Spain’s 10-year bonds increased to 6.5 percent which is close to 7 percent which led Greece Portugal and Ireland to seek international bailout.
There are some steps that have been taken to help Greece stay in the 17-nation bloc. The new French finance minister, Pierre Moscovici will meet with German finance minister Wolfgang Schaeuble today in Berlin as EU leaders prepare to hold a summit on May 23 in Brussels. The G8 meeting held in US encouraged Greece to stay in the 17-nation trading bloc. Greece is expected to hold another election within six weeks as talks to form unity government failed.
Despite investors having faith in the commitment of the German Chancellor Angela Merkel to keep the monetary union running, fears that an exit of a small member such as Greece will cause more departure have escalated and large speculators and hedge fund traders have indicated that the euro might continue to drop against the dollar.
The euro has dropped from this year’s high of $1.3487 registered on February 24. The 17-nation currency has depreciated by 0.8 percent since March against most of the developed-market peers. The euro has remained little unchanged against the dollar trading at $1.2798 during the Asian session. The currency had weakened 1.1 percent against the dollar during the last five days. The continuing problems in Greece and the debt crisis contagion are some of the factors that are forcing the EUR/USD pair down.
Disclaimer
Tradervox.com is not giving advice nor is qualified or licensed to provide financial advice. You must seek guidance from your personal advisors before acting on this information. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. Opinions expressed at Tradervox.com are those of the individual authors and do not necessarily represent the opinion of Tradervox.com or its management.
Article provided by TraderVox.com
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Since the original article was very long, I hereby provide an excerpt of the article “Gold Tripple Bottom & Stocks Oversold (Short Term) – Now What?” (Subscribers, click HERE to read the entire article).
On Gold:
Gold has now made a bullish reversal on a weekly basis, as price rallied sharply on Thursday and Friday.
Support held, which means Gold could be on the verge of setting a double/tripple bottom around $1,550:
Chart courtesy Prorealtime.com
On a monthly basis, we can see that the Bollinger Bands are narrowing, indicating that volatility has been low over the past couple of months (although it might not have felt like that for some traders). Volatility will not stay this low forever, so Gold is now getting ready for the next BIG MOVE. Notice that I am talking about a MONTHLY chart here, I am not talking about the day-to-day volatility (which has been quite extreme from time to time). This also means that it might take several more months before the next BIG move actually starts. However, keep an eye on the monthly Bollinger Bands, and follow the trend when the next Big Move starts.
Chart courtesy Prorealtime.com
On Silver:
Shorter term, we can see that the Commercials have reduced their Net Short positions in Silver to 15,980 contracts, a level not seen since late 2011, a time when Silver set a bottom at roughly the same price level as where it is trading today:
On Gold Miners:
The chart below illustrates the fact that Sentiment in Gold Mining Stocks is extremely low (illustrated by the Bullish Percent Index, which shows the % of stocks with a Buy signal on the Point & Figure Chart) . The green vertical lines show that almost every time sentiment is depressed, the HUI index is about to turn UP. The only 2 times it didn’t mark a bottom was in late 2008 and more recently, a couple of weeks ago.
Chart courtesy stockcharts.com
Not only is sentiment in Gold stocks depressed, it is also depressed relative to sentiment in the SP500, as illustrated by the chart below, which plots the ratio of $BPGDM by $BPSPX (the % of stocks in the SP500 with a Buy signal on the Point & Figure chart).
We can see that whenever sentiment in Gold miners (lower part) was depressed, it was not just “depressed”, but it was also depressed relative to sentiment in the SP500, and soon sentiment turned up in favor of Gold mining stocks
Chart courtesy stockcharts.com
On Equity markets:
The SP500 has now reached the 61.80% Retracement Level from the bottom in October 2011 to the top in April 2012.
Bollinger Bands are still widening, indicating that the Bottom is still not in sight. We haven’t seen real capitulation yet, although the SP500 was down 11 out of 13 trading days, with a maximum 0.25% rally on May 10th.
Next support comes in at 1,250-1,260 (50% Retracement Level & previous resistance line).
Chart courtesy Prorealtime.com
…
52.40% of the stocks in the SP500 are trading at the lowest level in 50 days, which is 5 standard deviations from the mean, which doesn’t occur that often:
Chart courtesy indexindicators.com
The following chart shows that the best times to buy stocks was in 1949 and 1982, and the best time to sell stocks was in the mid-60′s and in 2000. If history is any guide, then we should wait to buy stocks until this cycle is finished. This means it could take another 8-10 years before the next big Bull market starts:
Chart courtesy thechartstore.com
I then checked out the SP500 Inflation-Adjusted Total Return Index itself. We can clearly see that the index has been in a consolidation phase since 2000, just like from 1929 to 1949 (20 years) and from 1962 to 1982 (20 years). If this cycle (consolidation phase) also lasts 20 years, it means we have to wait until 2020 before the next bull market starts, which is in line with the statement above:
Chart courtesy thechartstore.com
On Bonds:
TLT is trading at 24.98% above its 150 weeks Exponential Moving Average and 29.82% above its 200 weeks Exponential Moving Average, which is quite stretched:
Chart courtesy stockcharts.com
In the original article, we look at Sentiment Charts, Put/Call ratio’s, UP issues Ratios, and more.
The entire article is available for subscribers only.
I have decided to only accept new subscribers until June 30th. From then on, my services will be open to existing subscribers ONLY. To secure your membership now, visit www.profitimes.com and subscribe now!
A good pal of mine works in Asia for a global investment bank.
He was over in China on a fact-finding mission recently – talking to miners, commodity traders and buyers. I called him up to see what he could tell me. He said, ‘The news from China wasn’t great… Most people are neutral to slightly bearish within China.’
With good reason – there have been some ominous creaks and groans coming out of the good ship China recently.
We know that China’s economy grew at 8.1% in the first three months of the year – that’s if you believe the numbers – but what about right now?
There a few things we can look at here and now, so we don’t have to wait months to find out today’s economic growth figure.
Things like electricity production growth, bank lending, and real estate figures for starters.
And they don’t look good.
This is probably a big reason the Aussie dollar and resources sector have taken a big hit recently. The Aussie Dollar has fallen 7% in just a few weeks.
Chinese electricity production may seem like an obscure thing to look at, but if you want to get an up-to-date snapshot of how much economic activity is taking place in a country, just look at the level of electricity the country is producing to meet the economy’s needs.
Every part of an economy needs power: homes, offices, factories, building sites, trains, airports, and of course government. So if an economy is growing, it needs to produce more power.
For the last 6 months, Chinese power production has grown between 7 and 12% (year on year).
But power production has abruptly stopped growing in China. The power produced in April was just 0.3% greater than a year earlier.
This is a worrying sign that the Chinese economy may have just ‘dropped anchor’.
But it’s not just power production.
The China Daily newspaper ran an article on Friday reporting that, ‘China’s big four banks made almost no new loans in the first half of May.’
China’s big four are Industrial and Commercial Bank of China [HKG: 1398], China Construction Bank [HKG: 0939], Bank of China [HKG: 3988], and Agricultural Bank of China [HKG: 1288].
Chinese lenders were already slowing down their lending. In April it fell to 681 billion, from 1001 billion yuan in March.
But still – zero new lending from ‘China’s big four’ in the first half of May comes as a shock
Last weekend’s Chinese financial data fits the same picture. These showed China’s imports grew at just 0.3% in April.
Residential construction growth in China has fallen from 16% to 4% in a year.
And it’s not selling either: sales are down 17.5%, and there is now 47.4% more residential floor space for sale than a year ago. Land sales are down 55% compared to last year.
This is hitting China’s growth rate hard as real estate investment makes up 13% of the GDP figure.
The evidence is mounting before your eyes that China’s economy is stalling.
Commodity markets are seeing the effect of this already. The Financial Times reports that,
‘”We have some clients in China asking us this week to defer volumes,” said a senior executive with a global commodities trading house, who warned that consumers were cautious. “China is hand to mouth at the moment”… A senior executive at another large trading house also confirmed there had been defaults and deferrals in both thermal coal and iron ore.’
If I’m reading these signs right then China’s economy is having a heart attack.
Commodity prices and resource stocks have taken a pasting recently, but could it get worse yet?
As China is Australia’s biggest customer, a China slowdown would be terrible news for the Australian economy.
So I asked my investment banking pal over in Asia what the view looked like from where he’s sitting.
He reckons that it’s hard to be outright bearish about China as they always seem to find a way…if prices fall far enough they could step in with intervention again.
I’ve often read that the Chinese political model values stability above almost everything else. They foster social cohesion by keeping growth super-sonic. So if China’s economic growth is stalling, they may do something drastic to avoid the social instability they fear.
China has just dropped its reserve rate requirement (RRR) from 20.5% to 20%. This means banks can lend more to encourage the whole merry-go-round to keep going.
But it’s going to take many more lollies than that from China’s monetary policy makers to stop the crash from the last sugar hit.
Dr. Alex Cowie
Editor, Diggers & Drillers
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The stock market has crashed. This makes it an excellent time to find the best stocks for the next twelve months.
A crashing market creates a great opportunity to buy some truly disruptive energy companies…and we’re not talking about wind, wave or solar power either.
We’re talking about investments in natural gas. And more specifically shale gas.
But why are we so sure now is the time to buy? Because we’ve seen it and been in the thick of it before…
Remember the bull market from March 2003 to November 2007, when oil stocks jumped 233%?
Or the one from March to November 2009, when the small-cap stocks we tipped over those eight months returned on average 85%? Or again from July 2010 to November 2010, when commodity stocks like Lynas Corp [ASX:LYC] and Alkane Resource [ASX: ALK] returned an average 160%?
Each one was a bull rally in a bear market.
The point is: stock market cycles don’t mean the world stops doing business. They don’t mean new opportunities aren’t out there. They just mean you have to work harder to find them.
And you have to be incredibly careful about your timing.
In fact, we believe that’s the key to making good punts in this market – knowing when the next rally is going to come.
Of course, nothing is guaranteed.
Just remember that even though the latest stage of the financial crisis is hogging the headlines, the world economy hasn’t stopped.
There are still small companies innovating and producing goods and services that are useful and valuable.
One area where innovation is happening on a scale never before seen is the energy sector.
According to the United States Energy Information Agency (EIA):
‘World proven reserves of natural gas as of January 1, 2010 are about 6,609 trillion cubic feet, and world technically recoverable gas resources are roughly 16,000 trillion cubic feet, largely excluding shale gas. Thus, adding the identified shale gas resources to other gas resources increases total world technically recoverable gas resources by over 40 percent to 22,600 trillion cubic feet.’
Thanks to new technology, the last few years have seen the potential natural gas supply increase by 40%.
And it won’t surprise you to learn that Australia has struck lucky again.
According to the EIA, Australia, along with 32 other nations, has a significant potential shale gas resource. And the best thing is…it’s untapped.
Not only that, but of the 33 nations, Australia is estimated to have the sixth largest resource…one that could boost Australia’s natural gas reserves by 200%!
Before we go on, perhaps you’re wondering…
In simple terms, shale is a layer of fine rock deposited over millions of years. Over time the rock compacts, and as with other rock formations, this traps organic material. Eventually, this forms oil and natural gas.
Conventional oil and gas deposits appear in porous rocks. The rock is drilled, and with the release of pressure (or by adding pressure) the oil and gas is drawn through gaps in the rocks.
However, shale is different. It’s so tightly packed that there are no gaps for the gas to pass through. That makes it pointless to use conventional drilling techniques.
To get around this problem shale gas producers use a method called ‘fracking’. That’s a slang term for hydraulic fracturing, where shale rocks are broken using high-pressure water and sand.
Fracturing (or fracking) the shale creates gaps in the rock, which releases the gas. The gas is then drawn up through the well. You can see the relative formations of conventional, coal bed and shale gases on the diagram below:
Now, there is some controversy surrounding shale gas. While 99.5% of the fracking process is just plain old water and sand, the remaining 0.5% contains a number of chemicals. Some claim these have the potential to pollute domestic water supplies.
However, to date there’s no concrete evidence to support these claims.
And according to a research report from the world-renowned and respected Massachusetts Institute of Technology (MIT), titled ‘Study on the Future of Natural Gas’:
‘The environmental impacts of shale development are challenging but manageable. Shale development requires large-scale fracturing of the shale formation to induce economic production rates. There has been concern that these fractures can also penetrate shallow freshwater zones and contaminate them with fracturing fluid, but there is no evidence that this is occurring.’
Look, we’re not saying drilling for shale gas is a clean process. But at the moment it’s our only realistic and viable alternative energy source. And the great news is it’s cheap…
At one point or another over the past two years commodity prices have soared. Except one…it has been left behind.
Look at some of the gains made by the following commodities:
And natural gas? Well, it has gained…nothing. In fact, U.S. natural gas prices have slumped, almost halving in the past 12 months.
Anyone hoping to make a huge speculative gain on natural gas has been sorely disappointed (unless they had short-sold natural gas). So why hasn’t the natural gas price gone up?
One reason is explorers are finding new natural gas resources all the time. And new technology has made it easier to recover gas from previously inaccessible areas.
There’s conventional gas, coal-seam gas and now the latest revolution in the industry – perhaps the biggest revolution – shale gas. All add to the global gas resource and supply…keeping down the natural gas price.
So, if the resource isn’t scarce and new technology is making it easier to find and recover, why on earth would we consider natural gas stocks?
For the simple reason that according to professor Michael Economides at the University of Houston, gas will be the fastest growing of the three fossil fuels (coal and oil are the other two) between now and 2030.
And despite all the talk about cutting the world’s dependence on fossil fuels, by 2030 coal, oil and gas will still supply over 80% of the world’s energy needs – about two-fifths of which will come from gas.
So, by backing natural gas, I’m playing the odds.
And with energy stakes taking a beating in recent weeks, now is a great time to buy into the shale gas story while they’re cheap.
Kris Sayce
Editor, Australian Small-Cap Investigator
From the Archives…
How the Ukraine Could Be Europe’s Biggest Shale Gas Play
2012-05-18 – Kris Sayce
Why Greece Can’t Afford to Stay in the Euro
2012-05-17 – Dan Denning
Get in Early on Shale Gas
2012-05-16 – Dr. Alex Cowie
APPEA – Day One at the Oil & Gas Show: Sand Dunes, Scuba Diving and Camels
2012-05-15 – Dr. Alex Cowie
The Case for Higher Gold Prices
2012-04-14 – Diane Alter
Why a Stock Market Crash is Great News For Shale Gas Investors
The European elections on May 6 only made the Eurozone’s problems even worse. The French and the Greeks have rejected sensible policies in favour of self-delusion.
Those elections, and the failure of Greece to form a government, have actually moved the Eurozone crisis one step further – from potential tragedy into a complete farce.
As investors, we can only watch horrified, knowing that a really bad outcome would seriously damage our own wealth.
But at this point, a Greek exit – or “Grexit” as it has come to be known – from the Eurozone would be the best thing that could happen.
The Greek election produced a very confused result. But one thing was clear: the Greek electorate has decisively rejected the rescue plan the outgoing government had so painstakingly negotiated with the EU.
The previous ruling party’s joint support declined to just 32% of the vote. That might be thought of as just retribution, since those parties produced Greece’s appalling fiscal mess by lying for decades about the true position of Greece’s public finances. (And let us not forget being abetted by Goldman Sachs in doing so).
However, the winners were not some new paragons of fiscal responsibility and free market government. They were anti-German Nazis (a peculiar combination when you think about it), communists and a truly unpleasant new leftist party, SYRIZA, led by the 37-year-old Alexis Tsipras.
SYRIZA’s politics, in that one can fathom them, spell nothing but trouble.
They seem to take the Argentine approach to governance – repudiate all your international obligations, spend like mad on the public sector, run xenophobic campaigns against your creditors, whine for more money from international institutions and, no doubt, nationalize anything that might be worth money.
Tsipras also made very sure no government could be formed so new elections must now be held June 17– which SYRIZA is expected to win. Given the peculiar Greek electoral system, which gives 50 bonus seats to the winning party, Tsipras is likely to form the next government.
Yet if the EU authorities have any sense, they will refuse to negotiate with a Tsipras government and throw Greece out of the euro.
This would cause Greek living standards to halve, but would reintroduce the market into the Greek economy, allowing its viable sectors such as tourism to flourish at the new lower exchange rate.
If this had been done before Tsipras appeared, as I have repeatedly recommended, it would have caused about 6-9 months of chaos, after which recovery would take place and Greek unemployment would rapidly decline.
With Tsipras, the government will instead become bloated beyond belief.
Billions upon billions will be stolen, unemployment will stay high (although state make-work jobs and false statistics will hide this) and Greece will decline into genuine poverty– since unlike Argentina it has few natural resources.
The Greeks will have brought this misery on themselves, but whereas a short sharp shock from a free exchange rate would do them good, and make them happier in the long run (since they would have productive jobs) one can only pity their miserable post-Tsipras existence.
The other possibility, however, is that the Eurozone authorities will mutter unhappily about their “democratic mandate” and allow Tsipras to neglect Greece’s commitments to reform, while providing yet more money.
They will rationalize this by claiming that the cost of another Greek bailout is less than that of the breakup of the euro. That’s rubbish, for two reasons.
First, it’s a horrible precedent; every dozy populist in southern Europe will see the European Central Bank and German taxpayers as endless slush funds for their witless schemes, while promises of reform and cutbacks will be universally evaded.
Second, the cost of a Grexit from the euro just isn’t that great.
We now know that the country has been run far worse than any other euro member. Italy has much smaller budget deficits, while Portugal, Ireland and Spain are making major efforts to clean up their act, with some signs of success.
Making an example of Greece, while providing loans where necessary to ring-fence the much better governments of Ireland, Portugal, Spain and Italy is still a viable strategy, provided France (which is in worse shape than Spain and arguably Italy) co-operates.
With Greece descending into impoverished chaos, the clamour from other electorates for populist overspending would be greatly diminished. Even in Europe, the smack of firm government can be made to work!
France could be a problem. The new Socialist President Francois Hollande has claimed he wants to relax austerity. He has however appointed moderates to his cabinet, with the new Prime Minister Jean-Marc Ayrault setting an example by cutting the pay of all cabinet ministers by 30%.
Hollande has also appointed the moderate Pierre Moscovici as finance minister who has described himself as a member of the deficit-cutting “serious left”. It suggests that France, at least, will not follow the Greek road to overspending.
Thus, if the Hollande government avoids repealing the limited reforms President Sarkozy had introduced (notably, increasing the retirement age from 60 to 62) and does not increase income tax to 75% as he promised in the election campaign France will probably avoid serious trouble.
On balance therefore, we can expect a few weeks of turmoil followed by a Greek exit from the euro and relatively calm sailing thereafter, PROVIDED the Eurozone authorities hang tough.
Of course, that is not generally in their nature, but one must hope.
Martin Hutchinson
Contributing Editor, Money Morning
Publisher’s Note: This article originally appeared in Money Morning USA
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