Futures have bounced since early pre-market trading based on a couple of news items out of Europe. First, the EU is reported to give Spain leeway until 2014 to make their deficit targets. Second, news came out that the European Commission is considering the prospect of issuing common euro bonds and directly capitalizing the banking sector. I believe the first news snippet, as it is becoming obvious that there is no way Spain can make its current deficit target so Europe is just acknowledging reality which is not the norm for the continent these days. As for the second piece of "news", I believe this is a total pipe-dream and that the European endgame is approaching.
Why euro bonds will not happen:
Germany will never allow it. The country has already anted up some two trillion euros over the past two decades for former East Germany and still have not got their previously communist brethren up to parity with Western Germany. Germans on the whole were against giving up their beloved Deutschemark to join the Euro in the first place. It is political suicide for any German politician to agree to underwrite the unproductive Greeks, Italians and Spaniards. It is an impossible message to ask Germans who are retiring in their late 60's and have made hard structural changes over the last decade to bail out their southern neighbors who are still retiring in their 50's. Any economist or politician who believes otherwise, I have some nice "wetlands" acreage (AKA, swampland) for sale cheap.
Even if the Germans lost their collective mind and agree to this arrangement, it would acquire huge constitutional changes across Europe as well as other major foundational changes. Given how slow Europe has moved on this crisis to this point, does anyone believe they could make these massive changes in time to be effective?
Instead of believing this latest head fake out of Europe, investors should focus on these numbers:
6.5% - Current yield on Spanish 10 year debt.
6.16% - Current yield on Italian 10 year debt.
30% - Current polling popularity of Syriza. This Greek far left party, which advocates not complying with the bailout provisions and yet wants to remain in euro (Talk about a pipe dream), is now back in the lead for the June 17th re-elections.
Until this European crisis is resolved (and we may have a long time to wait), I would advise investors to use any rallies to sell their high beta/cyclical/high debt positions. Personally I am using any significant sell-offs to deploy a small part of my dry powder using option strategies to pick up additional stakes in stocks with low valuations, absolutely pristine balance sheets and relatively low betas like Microsoft (MSFT), Oracle (ORCL) and Cisco Systems (CSCO).
Be careful out there.
