A Premature Panic?

Dave Gonigam – September 12, 2011

  • Greek default was always a threat… but suddenly, the market recognizes it
  • Short term: Cofnas sees “overreaction.” Longer term: Amoss paints a post-default scenario
  • How the weekend box office numbers could light a fire under a tiny pharmaceutical firm
  • Open mouth, eject $10 million
  • Readers plead for The 5 to hold politicians accountable, rise to Michael Pento’s defense, carp about the latest Social Security raid

   Gold hit an all-time record today. Just not in U.S. dollars.

It’s dawning on traders that Greece is not only not “fixed,” but may be on the verge of an honest-to-God default. Thus, gold has reached a record in euros of €1,375.

   There are rumblings that Germany is making plans to shovel capital into the banks and insurance companies if Greece defaults.

But that shouldn’t come as any surprise. So there’s no news that makes a Greek default any more likely today than it was last week… or last month… or last year. Nonetheless, we see market fallout like the following…

  • Traders in the credit default swap market peg Greece’s probability of default at a record high today — 95.9%
  • European stock indexes are getting crushed again. Germany’s DAX Index is down another 2.3% today… and down 32% since late July
  • The big French banks like Societe Generale — which have heavy exposure to Greek government bonds — are being charged more to borrow commercial paper than their competitors, anonymous sources tell Bloomberg.

This last point should worry you if you have cash parked in a money market fund. As we chronicled in mid-June, 44% of U.S. money market fund assets are invested in the short-term debt of European banks. And of that 44%, more than half are in the commercial paper of the big French banks.

If you need cash for short-term liquidity, for goodness sake, stick to U.S. T-bills — a point we underscore in the new issue of Apogee Advisory, coming tomorrow. If you want to be on board, here’s where to go.

   The currency markets themselves aren’t reacting to the latest Greek scare… at least not today.

The euro is nearly flat from Friday, at $1.363. The dollar index has weakened slightly to 77.4.

   Perhaps the currency markets are sniffing out that reports of a Greek default — while no doubt accurate — might well be premature. “The idea that a Greek default is inevitable is becoming less extremist,” says our currency-trading specialist, Abe Cofnas.

“Banks holding Greek bonds are facing extra scrutiny, with the cost of protecting against defaults on the Greek bonds (called credit default swaps) soaring to record levels. And headlines suggest there is talk about policy actions to support German banks in case of a Greek default.”

“These fears are a catalyst to the sell-off in the euro as well as the German DAX. In fact, they have had very close co-movements.”

“So no doubt investors are scared this morning. But as we have seen over the past few months, emotions on Monday are often overreactions.”

Thus is Abe counting on a bounce in both the euro and the DAX between now and Friday… and he’s advising his readers to play it accordingly. If all plays out as he expects, it would mean up to 150% gains by week’s end. For access to Strategic Currency Trader, look here.

   U.S. stocks aren’t reacting as badly to the latest Greece rumors. Still, the Dow is down another 100 points today after a vicious sell-off Friday. As of this writing, the blue chips are within 200 points of the low reached on Aug. 10.

   “A Greek default would spark a scary decline in stocks,” counsels Strategic Short Report’s Dan Amoss. “But it probably wouldn’t last very long.

“In the wake of such a decline, once the market gets comfortable with where the Greek bond losses lie (and which banks were dumb enough to write credit default swaps on Greek bonds), focus would return to the central banks’ inflationary policies.

“And every one of these central banks — perhaps even the People’s Bank of China — would shift into ‘easing’ mode in the wake of a Greek default.”

The timing would be, if nothing else, convenient for Federal Reserve governors. The Fed’s Open Market Committee meets in Washington Tuesday and Wednesday of next week to plot its next move.

   Gold priced in dollars did not reach a record today. Indeed, the spot price is down another 2% from Friday’s close, to $1,820.

For all its ups and downs, gold has yet to break below $1,800 during September.

Silver, meanwhile, is at $40.63. The white metal has held above $40 all this month.

   For the record, the FDIC has closed 71 banks so far in 2011. The latest came Friday, with a small bank in Milton, Fla.

At the current pace, the year would end with 103 bank failures… compared with 157 last year and 140 the year before.

   Ordinarily, we wouldn’t take note of what movie was tops at the box office over the weekend… but there’s an investment angle this time. And it has nothing to do with movie studios.

Contagion pulled in $23.1 million over the weekend. “The movie, which is about the inevitable next flu epidemic,” says our biotech specialist Patrick Cox, “was the big news at the Cannes Film Festival.

“Most importantly, director Steven Soderbergh turned to Columbia University’s Dr. Ian Lipkin, the director of the Center for Infection and Immunity, to get his science right. Lipkin is the renowned microbe hunter who has led efforts to fight many of the modern world’s worst disease threats.”

Patrick figures the movie might generate some buzz for a flu drug that’s just been submitted to the FDA. “Tests show that it works far, far better than available flu drugs — several orders of magnitude better, actually. Though the company doesn’t use such terms for legal reasons, I’m saying they have a one-dose cure for even the most lethal influenza viruses.

“Their technology is so effective and, at this point, validated that it’s mystifying that it’s not making headlines.” But as Patrick’s readers know, it’s before a company starts making headlines that the biggest gains can be made.

Patrick is eager to tell you about several such companies… and he’s even talked us into giving you a break on the membership fee to his premium advisory, Breakthrough Technology Alert. This discount is available only through midnight on Wednesday, so it pays to check it out now.

   We weren’t all that amused by — and thus, passed on the opportunity to comment about — the departure last week of Yahoo’s foul-mouthed CEO Carol Bartz. Or even her foul-mouthed tirade to Fortune afterward.

Until we saw it might cost her $10 million in severance she wouldn’t collect.

“These people f***ed me over,” Bartz said of Yahoo’s board after she was fired — over the telephone — on Tuesday.

She described the call from Chairman Roy Bostock: “I said, ‘Roy, I think that’s a [lawyer’s] script. Why don’t you have the balls to tell me yourself?’

“The board was so spooked by being cast as the worst board in the country,” Bartz went on. “Now they’re trying to show that they’re not the doofuses that they are.”

Somewhere in the course of that interview, we’re not exactly sure where, Bartz might well have violated the nondisparagement clause in her $10 million severance package, according to the San Jose Business Journal:

You’ve got to be f***ing s***ing me!

The clause is commonplace in the corporate world — a promise you won’t say bad things about your former employer once you part ways. Violate that, and you forfeit whatever you’re supposed to collect.

We have no idea how this will play out… But if Yahoo pursues the case, we do know we wouldn’t want to be in the room with Bartz whenever the papers arrive.

   “I went right to The 5 Friday,” a reader writes, “even though I had a buy recommendation from Chris Mayer sitting next to your email in my inbox. I look forward to your reporting and remarks every day, and I was not disappointed.

“Given the state of politicians these days, in which they all seem to promise the world only to change their stance after Election Day, I bet it will be a humdinger of a presidential race. There’s so much at stake that the promises of change will be flowing like the Vermont rivers after hurricane Irene.

“I was hoping you might consider documenting the claims and promises of each relevant candidate as we move along during the campaign (at least the big-picture issues). And then bring out the list later to contrast it to actual decisions and policy shifts as they occur. It just seems to me that somebody should be holding the politicians’ feet to the fire.”

The 5: We appreciate that you rely on us as a BS detector. But there are many sites, blogs, etc., that do a fine job of calling out a sitting president for breaking his promises. Just Google the name of the current president, or his immediate predecessor, along with “hypocrite,” and you’ll have more material than you’ll know what to do with.

We’d rather devote our manpower to digging up investment ideas that no one else is talking about — especially those that stand to profit from those broken promises.

   “Michael Pento is right on in his response, always has been,” writes a reader after our newest editor immediately found himself in the line of fire last week. “I am surprised he held back and was so politically correct in his response.

“Say it right out, the government has no money, period. They swindle, legislate and steal though taxation, borrowing and printing, and they do it at the point of a gun. I am surprised IRS agents don’t carry guns like Fish and Game.”

   “How can the Obama administration call for Social Security payroll tax cuts?” a reader inquires — with no prompting from us, we might add. “What happens in a couple of years down the road, with less money coming in for Social Security?

“I read incoming money does not match the outgoing benefits already. Congress already says Social Security is in trouble. This doesn’t bode well for me as a social security recipient, nor for all the baby boomers coming on board in the coming years. In a couple of years, Congress will be raising hell about how bad off Social Security is, as they do all the time, then they will want to take it out on all us ‘greedy’ senior citizens.

“I am very worried about this country and don’t know what to do about it, except vote them all out in 2012.”

The 5: You are correct about Social Security collecting less money than it sends out in checks. If you think political action is going to solve the problem, you’re welcome to your opinion.

But if you want to ensure a stream of retirement income, we suggest you might have to rely more on yourself. We have an entire service devoted to that proposition. You can see what it’s all about right here.

   “Very good issue Friday,” a reader writes of our pre-Sept. 11 reflections. “The ‘credible threat’ reminds me of the novel 1984.

“And the military adventures in to-be-lost battles and bases in far-flung places remind me of Napoleon’s adventure heading toward Moscow (and the Nazis as well). Supply lines were stretched to the point where defeat became inevitable… in this case, the supply line for the U.S. military is not K rations, but rations of USD.

“What does it take for the politicians to wake and realize that the ultimate self-made implosion is coming, and soon?”

   “Any chance,” our final reader inquires after seeing our item about the National Security Agency’s $2 billion complex in Utah that scoops up emails, web searches and business transactions, “we could, for a pool of investors, get our hands on something like that to spy on the pundits in Wall Street?

“I would love to know what is cooking inside Bank of America, Goldman Sachs and the others.”

The 5: Um, maybe you missed the point: When private entities do what you propose, it’s called hacking. When the government does it, it’s called law enforcement.

Cheers,

Dave Gonigam
The 5 Min. Forecast

P.S. “Scheming, speculation and sophisticated tax avoidance,” wrote Rep. Ron Paul, “have replaced productive efforts, savings and planning for the future… The futures and options markets have turned into a giant gambling game.”

What stands out about this passage is that he wrote it not this year, or in 2007 as a warning on the cusp of the global financial crisis… but in 1982.

“The new markets that have developed since the dollar lost its precise definition [as a measure of gold] reflect the ingenuity of man,” he continued. “Now we see futures sold in currencies, betting on the monetary inflation of various governments. Instead of buying a bond or Treasury bill and holding it, we can now speculate on a daily and massive basis.”

Ingenuity aside, he did not see this as a good thing. It’s as if Dr. Paul was anticipating, from the vantage point of 1982, things like collateralized debt obligations, credit default swaps and other derivative instruments that brought the system to its knees in 2008… and might be on the verge of doing so again.

Dr. Paul’s collected these insights in a slim volume called The Case for Gold. It was the “minority report” of President Reagan’s Gold Commission — which voted overwhelmingly against a return to the gold standard.

On Wednesday, Addison heads to Washington with a film crew to talk with Dr. Paul for another new documentary project. He’ll ask whether “the fix was in” with this commission: Did Reagan create it as a sop to some of his hard-money supporters, with no intention of following through?

Whatever Dr. Paul’s answers, The Case for Gold stands as a stark warning of events unfolding before our eyes. For a limited time, we’re still making copies available free of charge through this special offer.

rspertzel

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