Three Reasons Not to Sell (Just Yet) - The Ireland Version

by: Robert A. Graf

Despite the recent re-visit to the European Debt Crisis, my recommendations of agricultural, mining, and technology leaders such as Apple (NASDAQ:AAPL), Deere (NYSE:DE), Terra Nitrogen (NYSE:TNH), GLD and Silver Wheaton (NYSE:SLW) have weathered the recent distribution day well. By distribution, I mean folks selling all asset classes -- everything, metals, stocks, bonds, the kitchen sink. I still concur with my last sentiment regarding market outlook that we are looking more bullish than bearish. The stocks I mentioned above are all still soaring above their 50 and 200 day simple moving averages. Moreover, I am long these stocks because they bounce back very well from individual events such as “sell on the news” or one analyst downgrades.

(1) Macro still looks good short term

On the macro-level, the major indices are still looking overall bullish through this rocky disturbance. The Philly Manufacturing Index, widely held to be the most representative of the country, looked pretty good. One damper though is if Congress does not issue US unemployment checks in January. If it comes to that $30B will be withheld from the US economy suddenly. On the international front, gold bounced back to the relief of many. The new major wrinkle of course since my last post “Three reasons not to sell (just yet)" from last Tuesday, Nov. 9th is the intensification of the Irish portion of the debt crisis caused by the news that Austria didn’t want to fund it. When we awoke to the recurrent footage of street riots in Greece during the Spring, we needed to digest a lot of what was going on. These incidents occurred with the EUR/USD about the same as where it is now, in the low to mid 130s.

(2) US Bank exposure to all of PIGS is containable, although the Irish exposure adds up to the most at $82B USD.

The difference this time is that we know more about the situation and how much money is involved AND that the Irish situation involves the most money and is bigger than Spain. In my instablog dated April 25, 2010 on Seeking Alpha entitled, PIGS in perspective: a comparison of US exposure to European countries," I began: You may already know that the US exposure to the whole PIGS problem has been estimated to be $176B USD, and that the whole amount is spread over the 10 largest US Banks including Bank of America (NYSE:BAC), Citibank (NYSE:C), JP Morgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC), State Street (NYSE:STT), Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), Deutsche Bank (NYSE:DB), and HSBC (HBC), according to Stacy-Marie Ishmael published in the Financial Times from data compiled by Barclay's Capital.”

Importantly, I summarized that: FFIEC (Federal Financial Institutions Exam Council) data further breaks these amounts down to $9B for Portugal, $18B for Greece, $68B for Spain, and $82B for Ireland (all USD). Compared to the tier 1 capital base for the aforementioned banks of $848B, major American banks have 21% exposure to the PIGS problem--not insignificant.” What is different this time is that we now know that our bank exposure is not high enough to draw us in right away except in our role in the IMF, which is playing out now. Sure the mega US bank stocks will fall a few percent, but I predict they will bounce back from this incident.

(3) Ireland debt is huge at $465B (NYSEARCA:USD): UK and Germany to worry the most.

The total amount of Irish debt compared to other European countries is the greatest (again, from my 4/25 post): when we look at the combined exposure of European banks in Germany, France, and the U.K. to Ireland we get another big number: $465B USD, with Germany exposed to a whopping $180B, France at $80B, and the U.K. with a staggering $205B USD worth of exposure”. Again, Ireland is the biggest problem.

Today we learn that Ireland’s Aa2 rating will be downgraded by Moody’s (Dara Doyle and Simone Meier, 11/22/10, Bloomberg). I will watch the EUR/USD to see whether this news and the elections are enough to make the euro break 1.33293 as major support. The purported $130B (USD) bailout is addressing the $465B (USD) debt of Ireland. As noted from the instablog, Germany and U.K. have the most at stake.

Another issue that makes this situation difficult, despite the fact we know the financial burden in currency, is that Ireland has such a small population that the $130B price tag comes at 60% of GDP for that country (Bloomberg story cited earlier). So as the US banks stock price falls again today it is over their combined interest of $176B in this pie of Europe, with the current need to bail-out the $82B (USD) for Ireland. As for my holdings in domestic companies in agriculture, mining, and technology, I am not concerned enough right now to be worried. Although we know some news will surprise us, we do still have our sights on the magnitude of the problem. What it would take to take us to doomsday in my opinion is a restatement of all assets on the books of banks worldwide, which is unlikely to occur for quite some time, if ever. Keep buying DE, TNH, GLD, SLW and AAPL on up volume as the opportunities arise.

Author's Disclosure: long DE, TNH, GLD, SLW, AAPL