Sep 12, 2011

A Run on the Banks-European Style

September 12, 2011

Markets opened down but have since rallied to just below par this morning on significant negative speculation coming from Europe (see below). Bond markets are giving back some of their recent gains, commodities are down although crude oil is up (see picture below), gold is down, and the dollar is up. The NASDAQ is up slightly after Broadcom agreed to purchase chip maker Net Logic for a 50% premium over Friday’s close, or $3.7 billion.

The picture below shows the price of a tank of regular gas. Premium, at $4.15 per gallon, would have topped $100. With prices at the pump remaining high in spite of softer crude prices the question remains-why won’t we allow a domestic pipeline to both create jobs and ease the strain on consumers? Additionally, natural gas reserves in the Midwest and northeast are significant and could help to ease our reliance on carbon based fuels if drillers could get the necessary permits to release those reserves. Could Washington actually agree to create jobs, lower the strain on consumer pockets, increase tax revenues, and not cost the taxpayer any money? With this Administration in place, it's doubtful.

Speaking of lunacy coming from the Obama Administration, check out the Op-Ed in Saturday's Wall Street Journal, entitled "Obama's Jobs Speech: An Early Draft."

The news out of Europe is 2008-esque as it appears Germany may be willing to cut Greece lose to save Italy, Spain, and quite frankly themselves. According to Spiegel, German Finance ministry officials are going through scenarios whereby Greece defaults on their debt, including one where Greece exits the Euro and reinstates the drachma. The Germans may incur the SGP, a rule which limits the deficit to GDP and debt to GDP at 3% and 60% respectively for member countries. The limit has been exceeded at least 60 times since 1997, including 14 times by France and Germany. Ironically, Spain and Ireland only exceeded the limit four and five times respectively, all prior to 2007. Greece violated the limits every year. Prime Minister George Papandreou said that Greece will achieve the spending cuts needed to keep their bailout money coming, even though more than 25K anti-austerity protesters battled police in Thessaloniki.

Jamie Dimon, CEO of JP Morgan, has come out vociferously against the international capital rules from the Basel Committee on Banking Supervision. He stated that the US should reconsider its involvement in the group given the “anti-American” tilt to the rules. “I’m very close to thinking the United States shouldn’t be in Basel anymore. I would not have agreed to rules that are blatantly anti-American.” Personally I think it’s a mistake to outsource any rule-making which impacts key domestic industries, especially given the fragile nature of the US (and global) financial system.

European markets are weak this morning on concerns about the health of the continent. Banks in Europe are being valued at levels similar to the post-Lehman credit crunch, at an average of roughly 0.6x book value. The chart below shows the overnight lending rates in Europe. The spike indicates that the banks there are concerned about the stability of their brethren.

Reports are circulating that Libya will resume pumping oil sometime this week and that natural gas production will soon follow. Ali Tarhouni, the transitional government’s minister for oil and finance said the country’s oil infrastructure suffered little damage in the recent fighting.

The President’s $447 billion jobs bill will go to Congress tonight.

College football hit full swing last weekend, and the NFL launched its season after a strike shortened pre-season. There were some great games over the weekend. The game I’m looking forward to is the upcoming Criminal Bowl featuring Ohio State and Miami, both under investigation for nearly 100 violations of NCAA rules. I think both program deserve the death penalty, not as much for the violations as their hubris.

Have a great day


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