Hello Drachma My Old Friend

November 2, 2011

Sometimes a dog will bite the hand that feeds it. I don’t believe it does so because it hates the feeder, but instead is overly anxious to receive its treat, or maybe just showing that it still deserves some respect. Greece bit the hand that is feeding it this week by announcing a referendum which will allow the people a thumbs up or thumbs down vote on the austerity measures tied to further ECB/EFSF aid. The vote is designed to end the social unrest that has developed over the austerity and to help Prime Minister George Papandreou retain power.

What happens if Greece ultimately rejects the deal? My guess is that they become a cheap tourist destination and the big winner will be the local printers who will start cranking out worthless Drachma to replace the Euro. In other words, Greece will be out of the EU, which would probably be a good start in repairing what ails the country.

The uncertainty has thrown global equity markets into a swoon, with the S&P 500 falling 5% over the past two days. The EFSF was forced to cancel a bond sale today due to “lack of demand.” Uncertainty is never good for markets.

Uncertainty does help one investment-the dollar. The chart below, from Chris Kimble at Kimble Charting Solutions, shows the action in the dollar and its effort to break out. Gold has moved in the opposite direction, although it is staging a small rally today which has been attributed to massive short covering. Why was there such a large short position in gold? Monday was hedge fund redemption day, and funds were front running anticipated redemptions at Paulson & Co, which has a massive stake in gold and whose funds are down a reported 35% for the year.

Mary Hayashi, a member of the California Assembly, was arrested in San Francisco for shoplifting. Mrs. Hayashi was caught with $2500 worth of clothes she didn’t pay for outside of Nieman Marcus. Evidently the level of ethics required to serve in the Assembly is quite low given this comment from Hayashi’s spokesman after being asked if she would resign. “Absolutely not. She is one of the most respected members of the Assembly-a fine, upstanding citizen and a role model.” Uh, right, not a role model for my kids, but I’m sure in the twisted world of politics she’s a fine role model.

OK, marketing isn’t really my forte, but I do have a pretty innate sense for what sells and what doesn’t sell. Yesterday on my way home I snapped the picture below from my car. Something tells me the name of these apartments can’t be that helpful in filling vacancies.

While I’m plagiarizing charts, I thought I’d include this one from The Big Picture which shows how consumers spend their money on an annual basis.

Earnings are still pouring in, with 350 companies from the S&P 500 reporting so far. While 75% of companies have exceeded earnings estimates so far, only 58% of companies have exceeded sales estimates. The weakness in sales is certainly a direct result of the softer economy and matches management’s cautious tone in describing their business outlooks and also in hiring. Last quarter 75% of companies beat EPS estimates, with 72% beating sales estimates.

MF Global filed bankruptcy Monday, just after I sent my note. Yesterday Interactive Brokers, which had been viewed as a likely acquirer of the troubled company’s online brokerage assets, removed itself from the bidding after the revelation that management at MF Global had commingled client funds with firm assets as the firm was failing. That’s a HUGE NO NO! Muy Malo. The FBI is now investigating the firm, the US CFTC is planning to subpoena the firm, and Jon Corzine hasn’t been seen in public, although I’m sure the paparazzi are camped out at his house and will find him soon.

One of the key products helping the US win WWII was rubber. Controlling our own rubber production (think tires) helped us defeat the Axis powers as their production capacity was destroyed. Yesterday rubber futures for April delivery dropped by 3.4% as output from the US and China waned combined with concerns about future demand from Europe.

US auto sales were strong last month, led by Chrysler’s 27% jump. Toyota, still struggling to rebuild inventories after the earthquake and tsunami, saw sales fall by 7.8%. Overall unit sales rose 7.5% in the month.

China may be one step closer to allowing their currency to freely trade. The impact of the government’s efforts to control inflation and the economy without allowing the currency to float have been well documented, but has hit new heights recently. Yesterday a report in China Daily said that as many as 6 million construction workers on railway projects haven’t been paid for weeks because of a lack of cash. The construction is now near a standstill.

The Fed finishes their two day meeting today and Chairman Bernanke will be conducting a press conference. I watched the last one and let me tell you, don’t waste your time unless you’re having trouble sleeping. The good Chairman is full of canned answers that often don’t even match the questions.

It’s another day without the NBA, has anyone noticed? We had a kid come by our house on Halloween wearing a Laker jersey and a lock around his neck. He was a “locked out Laker.”

Have a great day

Ned