The Greek Crisis

A number of clients have expressed concern over the latest round of the EU –Greek debt negotiation. Is this going to result in a default which will drop stock and bond market prices worldwide?

This epic saga has gone on so long because the EU has done everything in its power to convince and cajole the Greeks to stay in the monetary union.

The Greeks for their part are happy to pay interest on their debts as long as someone gives them the Euros to do so.

The fact is they owe a total of $353 Billion dollars’ worth of Euros at today’s exchange rate of 1.12 Euros per US dollar.

Almost 75% of this debt or $264.75 Billion is owed to the International Monetary Fund and the EU itself. Those two institutions are Central Banks not commercial banks. They can print and lend money as they wish and their charters allow.

Neither the EU nor the IMF will go broke if the Greeks don t pay back what they owe. The big secret is they can’t afford to pay back this money.

Recently the EU has loaned the Greeks the cash to pay interest on the IMF loans. Some think an alternative, answer to this crisis is a 100 year Greek bond issued at low interest rates. I say why bother? These stalling tactics are now being ridiculed as preposterous by most observers.

This charade is about to end unless the Greeks get a better deal than the EU has offered to date. The Greek government refuses to negotiate a higher retirement age for their public workers which I believe is now 55 years of age. They want to keep their bloated public sector as it now is, fat and happy. They will accept no further cuts whatsoever and seem resolute. Hardworking Germans and others say no more. Poorer countries in the East of the Euro Zone say they can’t afford to pay Greek pensioners more than their citizens are getting.

So that leads markets to fret about the additional $88 Billion dollars owed to private individuals and institutions if the Greeks exit the Euro.

Here is a brief overview to put this matter in perspective:

• The Greeks are only 11 million people and had a $241 Billion GDP in 2013 or 0.39% of World GDP. 
• Entire Euro Zone had a$ 12.7 Trillion GDP in 2013.
• Tiny Switzerland had a $651 Billion dollar GDP and the USA had $16.8 Trillion GDP in 2013. 
• By way of further reference, Apple Computer has a stock market value of $735 Billion, Microsoft $372 Billion, Exxon $354 Billion, Berkshire Hathaway $342 Billion, Wells Fargo Bank $294 Billion, GE $ 274 Billion, Johnson & Johnson $ 273 Billion, Procter and Gamble $215 Billion, IBM $164 Billion, Intel $150 Billion and Cisco Systems $146 Billion. 

                             This is much ado about nothing, to paraphrase Shakespeare! 

The European Central Bank Chairman, Mr. Mario Draghi has indicated they are prepared if a default occurs. That means the Central Bank will keep liquidity flowing. They have a massive QE bond buying program of 60 Billion Euros per month in place.

Euro Zone interest rate rises will be kept in check with Central bank buying.

Spain, Italy, and Portugal will not bolt the Euro and this crisis will be over for most except the Greeks and their private bondholders.

There is not a huge amount of leverage tied to this Greek debt. Where it does exist investors holding this debt will be hurt and possibly wiped out. The system will be cleansed.

The Greeks get a fresh start with a new currency and may actually become more competitive.

The former CEO of PIMCO Mohamed El Arian puts the probability of default at 55% as of today.

Markets may react negatively at first but will return to normal .Our focus is on slow 2-2.5% GDP growth and corporate earnings.

The Sun will rise in the East!

Doug Coppola

John Coppola

June 16, 2015

Communication is for informational purposes only & doesn’t constitute offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by CFA or an associated person or entity. CFA does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. We do not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written in connection with the explanation of the matters described herein & not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed

June 2015

First Quarter 2015 GDP was revised down to -0.7 % as U.S. trade deficits soared on a stronger U.S. dollar. Nasty winter weather and a Port strike were also factors in the decline.

Consumer confidence slid to a 6 month low in May according to a University of Michigan survey coming in at 90.7% down from 95.9% in April.

There is little mention of millions of Americans still unemployed, despite the 5.4% official unemployment rate.

Please note that a 62.8% labor participation rates means that some 37.2% of job eligible Americans are no longer looking for work and are not counted among the “officially” unemployed.

Europe by contrast has an unemployed rate of 11.3% versus its 9.8% ten year average.

Bond yields remain firmly anchored at 2.12% for ten year notes almost unchanged from when the year began.

U.S. stocks in the S&P 500 index remain impervious to weak economic news and talk of pending FED interest rate hikes. The index closed at 2107.39 up 1 .1% in May.

Factset estimated on March 31, that earnings would drop 4.7% in Q1 2015. However, blended earnings of all SPX companies ended up 0.7%. The current P/E ratio on the index is 16.77 times a 12–month forward EPS estimate of $125.66.

Mergers and buybacks continue to support stock prices as CEO’s feel and act more confident. M&A activity in the U.S. had its largest first quarter since 2000 with $414.7 billion in deals. More deals are in the pipelines.

72 % of SPX index companies participated in share buybacks in the 4th quarter of 2014. On a trailing 12 month basis, according to Factset, $564.7 billion was spent on share repurchases an increase of 18 % over the previous year.

At this time most global equity markets seem unconcerned that growth is anemic in comparison to past recoveries as stocks benefit from low inflation, low wage pressure, and low commodity prices. Economists expect global GDP to improve for the balance of 2015 and in 2016.

We hear concern from clients and professional managers that this recovery has gone on too long without a recession and perhaps P/E ratios are now unrealistically high.

Slow growth combined with QE staves off any recessionary tendencies which traditionally come about as a result of excess economic enthusiasm or leverage. Low interest rates make bonds less attractive than stocks therefore raising P/E ratios. Both investor and consumer enthusiasm is low for this stage of a recovery.

Anemic growth often occurs after a financial crisis. Banks are not encouraged to lend but rather asked to rebuild capital.

Add to this cautionary mindset policies from Washington that have delivered excessive regulation. We see this manifested not only in Finance but in Healthcare.

Defense spending is shrinking. Only Technology and Bio technology have shown strong animal spirits. Energy has been a mixed bag but has at least provided excess supply leading to lower prices.

We continue to be concerned about massive government debts which the markets choose currently to ignore.

High sovereign debt levels do however keep governments from further wasteful spending and keep Central Bankers wary of raising rates too soon.

Higher rates would mean higher interest payments for all and therefore higher deficits. This vicious cycle is to be avoided at all costs.

So for now, the music plays on, the public keeps dancing and stocks keep rising.

Doug Coppola

John Coppola

May 29, 2015

Communication is for informational purposes only & doesn’t constitute offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by CFA or an associated person or entity. CFA does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. We do not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written in connection with the explanation of the matters described herein & not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed