Market Commentary

It appears Germany, France and the rest of the European Union
March 25, 2010

It appears Germany, France and the rest of the European Union (EU) have refused to bailout Greece forcing the previous unthinkable that this beleaguered nation is to petition the International Monetary Fund (IMF) for backing of its debt and perhaps ushering in the beginning of the end of the Euro. 

As most know the reason why Greece requires international funding is the result of high taxes, reckless spending, low growth and huge deficits.

Yesterday treasuries were killed, partially the result of a record tying $42 billion auction of five year notes that drew the lowest demand since July.   I ask is the fear trade quickly unwinding or are there other factors involved especially as the data was marginally weaker than expected?

Yesterday both Dow Jones and Bloomberg newswires reported the vast majority of financial firms are expecting the health care bill to cost considerably more than the $940 billion CBO price tag.  In fact partially because of health care, the bond market is now saying Berkshire Hathaway debt is more secure than treasuries.

Moody’s stated the US will spend more on debt service as percentage of revenue this year than any other top tier country except the UK.  America will spend 7% of taxes this year to service its debt and almost 11% in 2013 if the CBO estimates are correct.

I must write that I don’t view myself as a far right wing nut bag lambasting the Administration drawing perhaps suspect correlations to Southern Europe but I cannot disregard the possible interpretations the bond market is suggesting.

Several weeks ago I referenced Bob Woodward’s Book The Agenda that chronicled the first year of the Clinton Whitehouse.  President Clinton expressed great anger the bond market could control or dictate his Administration’s agenda.

As per data provided by Bloomberg, the government issued a record $2.1 trillion in debt in 2009, far exceeding the $1.08 trillion that was issued by investment grade companies.  The gap between private and public issuance is at an all time record and as inferred above is expected to increase, perhaps a major reason why a corporate bond issuer (Berkshire Hathaway) has a lower yield than treasuries for the first time since 1982.

Moreover and also as per Bloomberg corporate borrowers are reducing debt at a record pace reducing obligations by $282 billion during the fourth quarter to $7.1 trillion, the lowest amount in a decade.

As written several times the Administration has awakened the American electorate.  The vast majority of polls suggest most do not support health care reform.  CNN stated 67% of society views deficit spending the greatest threat facing the economy, an incredible reading given a 9.7% unemployment rate.

President Clinton changed direction two years into his presidency and left office as one of the most popular presidents in recent history.  Can President Obama do the same?

If the bond market is to serve as a guide the President might not have any other choice other than to alter his progressive western European agenda.

Last night the foreign markets were mixed. London was up 0.48%, Paris up 0.77%  and Frankfurt up 0.77%.  Japan was up 0.13% and Hang Sang down 1.10%.

The Dow should open moderately higher as Germany pledged to back a bilateral agreement between the IMF and EMZ to bail out Greece. The 10-year is up 6/32 to yield 3.83%.