Finland vs Greece vs Europe

No, it's not a football match I'm going to write about, even though Greece would have a much bigger chance succeeding there. Finland has gained much attention recently since their prime minister announced that Finland has gotten monetary collateral for supporting Greece. This means that Finland agreed to support the second bail-out package to Greece only if Greece would deposit equal amount of money as a collateral for Finland. If Greece would go bankrupt, Finland would keep the money.

For Finland this is mainly a domestic political campaign. Finnish voters are turning anti-euro and the government had to do something in order to win some votes back. For Greece, guaranteeing collateral was one way of securing the votes of all countries, including Finland.
Other countries in the eurozone though are (rightfully so) upset because if one country gets collateral, why shouldn't others? This would eventually lead to a situation where all the money borrowed to Greece would be deposited somewhere as collateral and there would be no money left for Greece to cover its costs. Is there any solution for this?

Seeking collateral for the money borrowed to Greece would be a good idea since this would discipline Greece as well. What could be used as a collateral though? One possibility could be natural resources. In 1992 my home country Estonia successfully carried out a monetary reform which substituted Russian ruble with Estonian krona. Estonia initially used our national forest and gold reserves as collateral for the krona. So let's look at Greece's natural resources and other reserves (from CIA World Fact Book):

• 991 million cubic meters of natural gas with a market value of around 138 billion USD (Bloomberg)
• 6,37 billion USD in gold reserves
• 10  million barrels of oil with a market value of around with a market value of around 1,1 billion USD (Bloomberg)

In addition to that Greece has deposits of bauxite, asbestos, nickel, magnesite and marble. So Greece just might have enough natural resources to at least partially put out a collateral for money received from other eurozone countries and the IMF. As a matter of fact natural gas, gold and oil reserves add about up to the total amount of the most recent bail-out package of 110 billion euros.

Crisis escalated (and managed) by ECB

I came across a blog (link) where Rebecca Wilder pointed out that hiking of interest rates in Europe has worsen the crisis in Europe. Take a look at this graph.

ECB (European Central Bank) has risen interest rates twice this year. In both cases the yields of 10-year government bonds of the most problematic countries (Yes, Belgium is not one of the hawks) has risen considerably. This means that these countries have to pay much bigger interest costs on their debt thus worsening situation with their budgets.

Now ECB has started buying government bonds of Italy and Spain in additon to Greek, Portuguese and Irish bonds. ECB now holds more than 100 billion of debt of these countries. While the ECB is terrified of inflation (reason for hiking interest rates) their colleagues from USA have speculated that inflation might be temporary. Maybe that's what ECB should do now - lower the interest rates so the euro would weaken supporting export and possibly lowering yields of problematic countries as well. Of course, maybe the ECB knows something we don't. Or maybe Jean-Claude Trichet (president of ECB) is busy buying all the bonds. We will know more maybe even on Friday when the ECB publishes their opinion on monetary developments in Europe. If not then, we will here more on the 8th of September when the Governing Council will meet in Frankfurt to discuss economic environment in the eurozone.

Gold bubble?

Take a look at a 1 year gold price chart in USD.

As you can see the price of gold is going parabolical and this, in fact, is a proof of a bubble forming especially considering we don't have hyperinflation in US. If you don't believe me take a look at the following two charts - first is a yearly price of silver where you can see a decent correction after parabolical rise. The second chart displays Nasdaq index during the famous dot.com boom in the beginning of the current century.

And here's Nasdaq

The most difficult question with all bubbles is this - will we see even higher prices or are we heading for a top. Since this is impossible to answer, I would recommend the following. Set a target price for your investment which for you is fundamentally justified for some reason. When this price level is achieved, sell and be happy that you made profit. Even if the price does goes up after you sold this is all speculative and it might as well go down and eat your profits.

The price of gold will come down at some point. The question is how far can it fly. What is your target price for gold?

Panic or what?

In case you haven't seen the picture, here's an insight to stock market movements.

Now take a look at the S&P500 stock index for the last 5 years.

Are we still in denial? Have we gone through panic already? Are we ready to capitulate? The only way you would know is if you felt sick each morning and you are ready to sell with whatever losses. Stock markets usually rise much slower then they fall. If you are a long term investor (2 years or more) then you wouldn't need to worry too much since eventually the markets will bounce back and we can start waiting for euphoria.

The bottom of 2009 came after the financial world as we know it was about to end unless lots of tax payers money was used to bail out some of the biggest banks in the world. Our current fears are driven by uncertainty and possibility that we might be heading for a recession again. The fundamental situation is not as bad than it was two years ago which makes me think that we will see the hopeless despondency phase (the bottom) much higher than in 2009. We might already be in a depression phase.

It is dangerous to catch a falling knife though so I would wait until we have seen some stability and strength in the market before I would start shopping for bargains again. There is nothing rational about market bottoms. Volume levels are also important since that is an indicator of smart money entering (or leaving) the market.

On Friday Ben Bernanke from the Fed is about to deliver a speech on economic conditions. While we probably won't hear QE3 or something similar announced we will get a pretty good picture on how the Fed sees the situation in economy. I think we will see some speculation on the markets before that. If you see markets rising this week then make sure you won't fall to "sell-the-news" reaction. Whatever the news are, we will probably see some selling action assuming there will be a lot of green this week.

Keep your head cool, your emotions in tack and we will see some news pretty soon.

The Pope in Spain - can Spain handle the costs?

There are tens of thousands of people on the streets in Spain rioting over papal visit and its high cost in times when Spain should cut unnecessary costs and deal with unemployment problems. These are the main arguments. Let's do the math in order to decide.

It is thought that papal visit will cost around 50 to 100 million euros to Spain. Price tags offered also include costs like cleaning, security etc in addition to everything regarding Pope's well-being.

It is thought that one or even two million people will try to get a glimpse of the Pope, many of them arriving from other countries even from as far as Philippines or Brazil. It is estimated that about 500 000 foreign pilgrims visit Spain to see the Pope. Average tourist spends around 90 euros per day according to Spanish tourism statistics (link). So even assuming that a tourist spends only two days in Spain will cover the costs of the event. It is thought that actual number of foreign tourists can even exceed 1 million people.

Not to mention those extra 10 000 policemen or thousands of cleaners brought to the streets with Spanish government money (included already in the price tags brought out).

Poster saying "Not with my taxes"

Let it not be a monetary argument because it seems like a nice boost to Spanish economy at a difficult time. The protest should more focus on the views of young Spaniards towards abortions and same-sex marriages or 0,7% religious tax rate imposed to all people.

72 percent of all Spanish people describe themselves as catholics. Amonghst young people only 46% describe themselves as catholic.

Another recession coming up in Europe?

There has been a lot of talk about another possible recession that the world could face. Focus on debt and spending isn't helping since government spending also contributes to economic growth. Following chart presents real economic growth (adjusted with inflation) on a quarterly basis (compared with previous quarter) in the biggest economies in Europe (also for comparison purposes EU27 and eurozone countries in average)

As can be seen from the chart the sudden slowdown occured in the second quarter of current year in all countries at the same time which is remarkable. It can also be seen that sudden slowdown occured again in the final quarter of 2010. The effects of the previous slowdown was thought to be related with extreme weather conditions in northern Europe. This shows that small things (or extraordinary) can have a big effect on economic growth - considering that it is already fragile due to the recent (and still ongoing) financial crisis.

The following chart presents real economic growth on an annual basis (GDP value of current quarter vs GDP value of the same quarter last year - this methodology is not used by major statistics departments which calculate annual growth by multiplying current quarter growth by 4).

From this chart it can be seen that growth indeed has slowed considerably but there is no reason for panic. Previous recession was followed by a quick recovery and the growth has slowed. Whether we will go into negative territory we will find out in October-November.

Couple of more things have to be taken into account. Second quarter numbers obviously include the effects of Japanese nuclear disaster in March and since the whole supply line of major industries was disrupted some of the growth might have just gone there. Also European Central Bank has risen interest rates already twice this year which definitely has a negative effect as well. Cutting of budget deficits isn't helping.

We might see a bounce in economic numbers if some of the weak growth was caused indeed by the Japanese disaster. We might also see ECB lowering rates if weak growth continues and in addition to that some additional measures by the Bank of England (monetary stimulus). All in all I am pretty confident that we will not see a bad recession coming just now.

Soviet Union vol 2

Call it whatever you want. Putin calls it the Eurasian economic union. The idea of Soviet Union has reinveted itself. Only this time the union is not forced by war and occupation but instead, economic cooperation.

It will be formed based upon the Eurasian Economic Community or EurAsEc which is active today.  The first agreements came into effect already a year ago when Russia, Kazakhstan and Belarus removed tariffs and custom controls along the countries. Current members also include Kyrgyzstan and Tajikistan (Uzbekistan currently suspended). The single market currently covers around 170 million people already and is bound to grow more.

Kyrgyzstan and Tajikistan have already expressed interest in joining the new union. There has been talk of a common currency from 2013 onwards. With that move Putin will try to get countries like pro-European Ukraine and Chinese influenced Kazakhstan to integrate more thoroughly with Russian market.

It's a world of unions, not a world of single countries anymore. The process is influenced by the coming of countries like China and India which are just too big to ignore.

Some more info HERE

Time to buy Nokia?

Shares of Nokia were up 17% yesterday after Google announced it will buy Motorola Mobility. Seems like investors were placing bets that Nokia could be the next takeover target. I'm not sure this would be the best investment thesis, here's why.

First of all Google's push to take over MM was not their strategic move to start producing their own mobile phones. Google is and will be an advertising company. It was the huge number of patents, especially in wireless solutions, that MM had that was of interest to Google (more specifically around 17 000 patents and 7 000 applications). For Google the ownership of the patents could mean that its partners will receive relevant licences in competitive terms which will secure Android's market position. It's a game of patents and since Microsoft already has a partnership with Nokia there's no point in buying them.

Nokia Windows 7 phone concept
circulating in the web

For me news about order of 2 million Windows 7 Nokia phones were much more important. There are rumors around that we might see a presentation of the phone already in September and they will hit the shelves for Christmas. Another interesting rumour going around is that Nokia is producing tablets secretly without involving Nokia brand. Techradar link

So for Nokia's case the question is not whether Nokia is a takeover target but whether they will succeed with their new phones (and tablets.. if the rumours are true..). For speculative purposes I would consider taking a small position in the coming months after there is more certainty about the economic recovery and hold the position until the results of Q4 2011 since there will probably be a lot of uncertainty regarding their sales. For long-term investor I would recommend waiting for the results of christmas sale and subsequent comments before taking a position.

Bye-bye eurobonds, enjoy the crisis

Germany and France have once again publicly opposed eurobonds as a measure of resolving the crisis. Eurobonds are like regular bonds, only they are guaranteed by all eurozone members jointly which means that they carry very low interests and are probably rated with a triple A rating (maybe not as low rates as in Germany but relatively low still). Eurobonds would replace national bonds so all countries issuing eurobonds can borrow money from the markets with a low price.

Eurobonds would cure one of the biggest problem currently spreading in the markets - possibility of attacking weaker countries. What happened in Greece, Ireland and Portugal was about to happen in Spain and Italy. Since these countries didn't come out of the recession as quick and their public finances were a mess, yields on their national bonds started to rise quickly. This means that bigger interest costs have to be paid for their national debt hence making their fiscal position even worse. Weaker fiscal position means bigger risks again and yields rise again - it's a self-fulfilling process. With commonly guaranteed eurobonds attacking countries' bond markets is not possible (in normal circumstance) and all member-states can borrow cheaply.

Thus with eurobonds we can also cure the biggest problem today. With cheap money eurozone countries could (instead of too much austerity right now) stimulate investments and introduce reforms like targeting tax evasion for example. This would lead problematic countries to growth and cure the budget deficit problem as well (together with moderate austerity of course).

So why Germany and France oppose eurobonds. Their main argument is that without common economic and budgetary policies there is no point in issuing jointly backed eurobonds because this would punish stronger countries (by raising their interest costs). This is of course true but countries like Germany and France could push through any reforms they wanted in EU. Especially at times when the whole Europe is looking for a way out of this mess. We have elections coming in Germany and Mrs Merkel has voters to worry for. Main opposition parties in Germany already support eurobonds and thus it is a matter of time when they are introduced.

Until then, bye-bye eurobonds and enjoy the crisis!

Why short selling ban should matter right now

There have been various references to the ban of short selling initiated by US in 2008 compared with EU's decision today. It didn't work then, markets did not stabilize and fell even more. I'd say that situation is very different right now. Back in 2008 the markets were driven downwards by bad fundamentals and outlook. Stocks didn't fall because of short selling (only). Right now there is much uncertainty in the markets. Whether we're going to see a double dip (another recession) or not remains unclear. Fundamentals are not terrible, the economies of the biggest are recovering, though slowly. Speculative greed and fear are driving the markets right now so ban of short selling will reduce the possibility of gaining from falling markets hence reducing the fear as well. Not to mention margin calls.