Updates from Greece and Spain

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Father’s Day here in the US was not ruined by any bad news from the Greek election on Sunday. Before I get into the business matters of the day, I want to thank each an every father out there for being a positive role model for their children, and perhaps now grandchildren as well. I fear that we have a crisis of culture in our society and much of that stems from a weak or absent father figure for our country’s kids. Fathers (and mothers) are incredibly important in determining the character and productivity of our youth, and their job is never done. So thank you to all of you for your important work, and I hope you all had a wonderful weekend with your families.

As for the business at hand today, the Greek election did go the way the markets would have hoped – at least so far. Greece’s newly elected conservatives expect to be able to form a coalition government with the Socialists today, allowing the two parties that dominated politics for decades to share power despite a major anti-establishment election vote. Conservative New Democracy leader Antonis Samaras has promised to negotiate less punishing terms for Greece’s international bailout, after only narrowly beating a radical left-wing party that campaigned to scrap the austerity deal entirely.

The overarching theme is that the majority of Greeks wish to stay associated with the Eurozone and they now potentially have a government structure that might help that get done. It goes almost without saying, however, that this isn’t a sure thing. Earlier this week analysts at Citigroup Global Markets said the likelihood of Greece exiting the euro zone (something now being dubbed a “Grexit”) over the next 12 to 18 months remains between 50% and 75% even after pro-bailout parties that plan to stick to European Union-imposed austerity measures prevailed. The firm noted that there is little room for the new government to change the existing bailout program and with this in mind; Citigroup’s probabilities for a “Grexit” remain unchanged.

I think they might be right about that. I think there might be a better chance for an orderly exit with this new Coalition rather than a hasty jumbled mess fueled by political angst had the elections gone another way. But in the end, there is likely too much to clean up in Greece to keep them in the Eurozone. The conversations behind the scenes in coming quarters will likely shift to viability on Greece’s own in a coordinated effort with the European financial organizations rather than sustainability within the Eurozone. The authorities will probably go into anti-contagion mode and give up on save-Greece mode. This might serve the European continent and the entire world very well, by the way. I don’t think there’s a story of fear to be told if things are done with a little breathing room and coordinated efforts. It becomes less likely the damage caused by the Grexit would materially impact the other troubled European banks and nations.

This shifts our focus now over to Spain, which is perhaps the real problem in Europe.

The brief rally from Greece’s vote was quickly extinguished by a batch of bad news out of Spain that rattled faith in the currency bloc’s ability to support its most troubled members. Fresh data from Spain’s central bank showed the country’s lenders were sitting on the highest level of bad loans in 18 years and that their deposits continued to leak away. Fears of big trouble in Spain are best seen in their bond yields, and those bond yields have continued to spike higher. This isn’t good because it means the cost of their substantial debt continues to grow. As the cost of servicing the debt grows it just gets that much more difficult to create economic growth and the vicious cycle is very difficult to break. Ten year treasury yields are most widely used as the barometer for these pressures, and this latest news has driven Spanish bond yields deep into territory that is widely viewed as unsustainable. The yield on the Spanish 10-year bond was at 7.18% late yesterday, a euro-era record for the zone’s fourth-largest economy. This is an issue potentially far more worrisome and costly than Greece.

The saving grace, however, is that Spain continues to see demand each time they come to the markets with a new bond offering. They have to pay a higher rate each time they come to the market, but they always find welcome buyers. In my opinion, the major reason is the expectation that world financial forces simply won’t let Spain go bad.

We are seeing proof of this theory currently at the G-20 meeting in Mexico. The news is now out from that meeting that China agreed to contribute some $43 billion to the IMF (International Monetary Fund). Other emerging markets also added to the bailout fund, with Mexico, Brazil, Russia, and India each pledging $10 billion. The U.S. and Canada pledged no new funding. In total, this now boosts IMF funding commitments to $456 billion. In simple terms, the IMF is yet another financial backstop in place to avoid any global financial calamity. I would have to think that buyers showing up for new Spanish bond auctions have these backstops in mind. I can’t personally imagine why they’d buy Spain’s debt otherwise.

Update on the USA and China

Given the headlines of recent months, Greece and Spain have been focal points of my recent messages. Let’s at least check in on the world’s two largest economies as well.

Beginning with the US, data continues to mount that our economic recovery is painfully slow but steady. To be truly self-sustaining the recovery needs to pick up some speed relatively soon. Today’s bright news story came from, of all places, the homebuilding sector. Even though today’s report didn’t quite hit expectations, it did show that housing starts were at 708,000 in May, which is up 28.5% from a year ago. Further, homebuilder confidence – as measured by the NAHB index – increased in June to its highest level in five years. We all know that the collapse in housing has had a devastating effect on the US economy and job creation. Now it looks like the second quarter of 2012 will be the fifth straight quarter where home building boosts real GDP according to data published by First Trust Advisors. This is a welcome turnaround from years past, to say the least.

Now all eyes are on the FOMC’s 2-day meeting. Will Ben Bernanke and the group continue Operation Twist beyond the scheduled end in a matter of weeks? Will there be any big change in policy or any new language about how long they’ll promise to keep rates low? These are now the big questions. I expect, one way another, they’ll keep to their accommodative stance. It’s just a question of exactly how they do it and what the financial press decides to nickname it.

In my view, the bigger concerns should be about the so-called fiscal cliff. Companies are starting to delay hiring and spending out of concern that Congress won’t reach a compromise in time to avoid automatic tax increases and budget cuts that would pull billions of dollars of purchasing power out of the economy. A figure on the order of $600 billion in higher taxes and reductions in defense and other government programs starting in 2013 has US companies thinking twice about how to expand or use their capital. They need clarity. When they get it, I think they’ll perform very well, just as they always have. At the moment our companies are cash rich, but confidence poor.

In China, fears of rapidly decelerating growth have subsided lately. They have posted slightly better than expected economic growth data in recent weeks and they have also cut interest rates. Their growth rate will fall as they continue to develop, but it figures to remain high enough to support global growth.

Investment Perspective

Stock market performance still looks to be all US driven. Looking over some data this morning provided by Wells Fargo I see the major US markets ahead by roughly 4 or 5% year to date, and also about the same amount over the past 12 months. But looking around the rest of the world I see the average throughout European markets to be a year to date loss of between 2 and 3% with a past 12 months tally of losses more on the order of 12 to 15%. For the Asian markets those figures are positive year to date around 3%, but also negative over the past 12 months by between 10 and 12%. Finally, the emerging markets are also ahead slightly this year at up roughly 3 to 4%, but down 5 to 7% on average for the past full year. A quick look at metals shows gold up about 3% year to date and up 5% for the past 12 months, but silver being hit by about 4% year to date and roughly 21% from a year ago.

To me this looks to underscore my view that we continue to be in a global holding pattern on average, but you can see a gradual strengthening of things. It is probably more accurate to say that things are getting “less bad” rather than to say they are really strengthening. Nevertheless, there is a trend forming with an upside bias. I still hold the opinion that we’ll be higher in global markets in the coming years and investors are correct to expect their patience to reward them.

While the US had led the way for a while in terms of performance, the rest of the world’s markets – with the likely exception of the developed European markets – are likely to close the gap in coming years. I think investors should continue to favor the US for a bit longer, but they certainly should not exclude foreign diversification. This foreign exposure has been a detractor from their performance in recent years, but I think those figures will shift as the future unfolds.

Social Security Webinar

It is very important that every retiree make the best decision about their social security benefits to maximize their income stream for life. Unfortunately, the Social Security Administration reports that an estimated 74% of retired Americans are collecting reduced Social Security benefits —likely because they are unaware of options that may increase their benefit payments. In an effort to prepare people as much as possible for this critical decision, my partner Ken Moyer and I are hosting an upcoming “webinar” (web based seminar) on how to get the most out of social security. Please contact us for an invitation and description of the event. It will be held on Wednesday of next week from 1:00 to 1:30 EST. The webinar will be presented by our colleagues at Principal Financial Group. It will last about 30 minutes and a replay will be available a few days after the presentation. Please feel free to forward the information to a friend if you’d like; this is an open event intended to help as many people as possible maximize their hard earned social security benefits.

New Clearing Partner

I am very excited to announce that International Assets will soon be entering into a new relationship with National Financial Services (NFS) as our clearing agent. In a nutshell, we enjoyed a great relationship with Pershing for years, but as we continue to grow as a firm and provide more comprehensive services to our global clientele, we felt NFS was the better firm to meet our needs. This change is being made on the merits of service alone. If we are to provide the level of service we’d be proud of to our clients, we need matching service from our clearing partner. These services aren’t limited to administrative or operational issues; they include enhanced technology and custody capabilities.

This process will be underway very soon and Shelby and Linda will help assure that the transition is as simple as possible for everyone. There will no doubt be the occasional signature needed here and there, and also the need to re-establish some passwords or banking instructions; but this should prove to be a simple and painless transition. Please don’t hesitate to call us with any questions you might have about the change.

The takeaways:

  • Greece made it through an important hurdle, but they are not likely to finish the full course and stay in the Eurozone permanently. It is possible that they can pull it off, but it isn’t going to be easy at all. In the event they do exit the Eurozone, the amount of damage this would do the global economy is unknown, but seen as less of a threat given the breathing room and expectations of respectable austerity brought by their recent elections.
  • Spain is going to be a very big story this summer. News of enhanced support aimed at preventing a full fledged financial crisis from the G-20 and elsewhere is likely why they are still able to borrow money and keep their economy off the rails entirely. Odds are that they will need to rely on these additional bail out sources over time.
  • The US and China are both making tepid economic progress. Based on this, there continues to be little reason to fear the worst for financial assets in my view. I still don’t expect stocks to skyrocket higher, but I do expect them to meander in that direction.
  •  If you or anyone you know has questions about how to maximize your social security benefits, please join us for the webinar next week. If you can’t attend the webinar, please check out the replay when you have the chance.
  • I am looking forward to our future with NFS as our new clearing partner. You will be hearing more about his transition in the weeks ahead. If you have any questions at all about the change, please don’t hesitate to give us a call.

Commentary by Jeff Winn, Financial Planning Orlando FL


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