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Pacifica Partners Inc. is a discretionary investment management firm head-quartered in Surrey (Greater Vancouver) BC, Canada with clients located across both the United States and Canada. Pacifica Partners' focuses on using low cost investment vehicles to provide non-benchmark returns in both... More
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  • Investors focus on Tea Party while Ireland roiled
    When notorious US bank robber Willie Sutton was asked why he robbed banks, he replied "because that's where the money was." (Sutton actually denied ever saying that - blaming it on a reporter looking for a catchy quote.) What does Willie Sutton have to do with the Tea Party?

    One of the central planks of the Tea Party's political platform that helped to contribute to the landslide Republican wins in the US mid-term elections was based on the fervor of its members and supporters to tame the deficit and to make permanent the Bush tax cuts. However, when asked, many voters who are angry at the level of government spending want to exclude Social Security, Medicare/Medicaid and the Department of Defense.


    This is a significant point because these three items and the interest on the national debt account for over 65% of total US spending according to the Government Accountability Office (NYSE:GAO) - a branch of the US government. In short, that is where the money is. Furthermore, interest on the debt is only about 5% of total spending - the lowest it has been in many years due to the record lows in interest rates. Once this reality sets in for many who are demanding government spending cuts, it is likely that the tax cut agenda will get priority over the necessary spending cuts.

     


    Bond Bandwagon

     

     

    Earlier this year, European politicians suffered a political earthquake of their own when the financial markets pushed the nations of Europe to embrace fiscal austerity. After years of criticism, Europe's nations came to grips with their fiscal imbalances and social spending largesse to institute some of the most drastic spending cuts in over a generation. Led by the United Kingdom, Greece, Portugal, Spain and Ireland, the citizenry of Europe is facing public sector wage cuts, tax hikes and spending cuts on social services. Every level of society is impacted.


    Already it seems that the electorate of many European nations is fed up with the cuts that are widely perceived to be aimed at helping the financial markets rather than the general population. In Ireland, where spending cuts are some of the most drastic in the Western world, austerity fatigue is setting in. A backlash is developing and the spending cuts are starting to bite into the ability of the economy to maintain forward momentum.


    In addition, the markets are getting worried that Ireland's resolve is waning - along with revenue projections that are now seemingly not going to be met. Thus, the interest rates on Irish government debt are now screaming higher. It was interesting how little coverage this story has received as it was overshadowed by the attention on the Tea Party and the US election.


    As the chart shows, if the US were to ever suffer the wrath of the financial markets as the nations of Europe have, the US political establishment would finally have to make the budgetary decisions that so many have called for. The problem is that talk is cheap - the path to fiscal balance is going to be tough. If this so called political revolution is to have a meaningful impact on the course of history, tough choices are going to have to be made. It is easy to argue for tax cuts as the solution to every economic ill - but as Europe is finding out, the path to fiscal responsibility is often tougher than it looks.

    - Pacifica Partners Capital Management & Financial Post

    This report is for information purposes only and is neither a solicitation for the purchase of securities nor an offer of securities. The information contained in this report has been compiled from sources we believe to be reliable, however, we make no guarantee, representation or warranty, expressed or implied, as to such information’s accuracy or completeness. All opinions and estimates contained in this report, whether or not our own, are based on assumptions we believe to be reasonable as of the date of the report and are subject to change without notice. Past performance is not indicative of future performance. Please note that, as at the date of this report, our firm may hold positions in some of the companies mentioned.



    Disclosure: no positions mentioned
    Nov 04 4:15 PM | Link | 1 Comment
  • Greece's Debt Crisis Shakes Investor Complacency
     

     

    Over the last several months, the world has watched the events in Europe unfold with a sense of disbelief mixed in with a measure of anxiety. The disbelief comes from the fact that many investors must be asking themselves how the world could be confronting yet another credit crisis – when we just seemed to be finished papering over the last one. The anxiety comes from the fact that there are some prognosticators who believe that Greece is just the tip of the iceberg – and other European nations such as Portugal, Italy, Ireland, and Spain are next on the bailout list. Many observers believe that the very existence of the Euro and the European Union is being called into question.


    Greece’s citizens are finding out firsthand the implications of a government that has allowed a disregard for fiscal discipline to run unchecked. The cost is real. Greece is trying to take corrective measures to deal with its debt crisis by enacting wage rollbacks, pension benefit reductions, cuts to government programs and higher taxes. This is a tall order at the best of times let alone when your fellow members of the European Union (i.e. your bankers) are facing reluctant voters at home who would rather see Greece kicked out of the European Union.


    The recent aid package announced this past weekend in which almost $145 billion (more than twice the originally proposed $58 billion) in loans would be used to prop up Greece over the next three years. It was supposed to have calmed the markets. Instead, the markets have shrugged it off and Greek interest rates are still rising. In part, nobody seems to believe that the Greeks can deliver on their promised return to fiscal responsibility. The Euro has continued to fall and the response by the Greek population is one of shock and anger.


    As the Greek government has tried to implement very tough spending controls, its citizens have responded with anger. Last month, Greece’s air force showed its displeasure as several members of the air force decided to “take an unscheduled day off” and the country has seen some violent protests.


    Most individuals in North America might believe that this is a European problem and does not impact them. For the most part this is true – thus far. What we are seeing is a general aversion to sovereign credit. The markets are telling governments that “We are not confident in your abilities to pay back the money that you owe”. If this aversion continues, governments will have to offer greater incentive to investors in order to sell their debt. Recently, before the aid package was announced, Greek two-year bonds were seen yielding 18% -indicating that the markets viewed them as being high risk.


    The shockwaves from the Greek debt crisis have sent the yields on corporate bonds higher as investors have decided to reign in their appetite for risk assets. The Euro has tumbled, the US dollar seems to be regaining some respect and investors have shrugged off a fairly decent performance from corporations that have reported recent quarterly earnings.


    Ironically, only a few short weeks ago, Greece was able to float a bond issue to investors that saw such significant demand that it was oversubscribed. But this was not to last as these bonds quickly began trading for less than their issue price – a sign that some investors underestimated the extent of the Greek debt crisis.


    The real issue that has not gotten so much attention is the level of debt exposure the commercial banking industry has to debt issued by the PIIGS. The chart below shows that the European banks have over $2 trillion in debt exposure to the PIIGS group of countries.


    Global Banking Crisis

    (Click on chart to enlarge - Courtesy: Barrons Online)

     

    This is one of the real reasons (along with trying to maintain the credibility of the Euro) that the European Union countries have no choice but to try to stabilize the sovereign debt crisis. For those who think this is a European problem, we have to look at the involvement of the International Monetary Fund (NYSE:IMF) which will contribute about 30% of the funds to Greece. The largest shareholder in the IMF is the US which means US taxpayers will be contributing a large portion of the rescue package.


    It is perhaps amazing that this issue has not come to the front in political discussion yet in the US. For that matter, Canadians are also seemingly quiet on this issue. Given how much political backlash there was for bailing out GM, the banks or other industries during the financial crisis - this is surprising.


    The crisis in Greece is nowhere near the size of the one that enveloped the financial markets nearly two years ago – but it is significant. The question is whether or not this crisis will become a contagion.


    For investors, there are always winners and losers in every crisis – and opportunity to be had. The problem is that too many investors were caught flat footed by this crisis as it has been bubbling for some time. Hence, the violent reaction we are now seeing in the financial markets.


    As we have commented before, complacency levels had set in amongst investors over the last several months and we know from history, that complacency is often replaced with panic.

    Pacifica Partners & Financial Post

    Legal Disclaimer 

    This report is for information purposes only and is neither a solicitation for the purchase of securities nor an offer of securities. The information contained in this report has been compiled from sources we believe to be reliable, however, we make no guarantee, representation or warranty, expressed or implied, as to such information’s accuracy or completeness. All opinions and estimates contained in this report, whether or not our own, are based on assumptions we believe to be reasonable as of the date of the report and are subject to change without notice. Past performance is not indicative of future performance. Please note that, as at the date of this report, our firm may hold positions in some of the companies mentioned.



    Disclosure: No Stocks Mentioned
    May 06 1:51 PM | Link | Comment!
  • Bernanke or Obama: Who should get credit for stabilizing the economy?
     Watching the Sunday morning talk shows on the US networks is always an entertaining experience for the politically inclined. No matter what the issue being discussed, both sides are advocated with verbal vigor.

    This past weekend, one particular show was asking the panel whether President Obama’s economic policies are responsible for stabilizing the economy and the financial markets. The White House has been expressing its opinion that its stimulus program, jobs bill and various other policies are starting to have an impact.


    What is interesting is that in the heat of political debate, there is one person who does not seem to get any credit and that person is Ben Bernanke. As head of the Federal Reserve, he was confronted with a financial crisis that was unprecedented in scope. The policy making playbook needed some instant updating as events were seemingly spinning out of control.


    While the level of fiscal policy coordination amongst the major economies was certainly helpful in instilling confidence to help turn the tide, Bernanke led the charge from the monetary policy side of the rescue effort.


    Watching the political pundits kick the issue around while missing key facts in their discussion is sometimes frustrating. For example, if we look at the stocks that comprise the S&P 100 Index (an index of the 100 largest members of the S&P 500 stock market index) we can see that the share prices of 29 of these 100 companies bottomed either before the 2008 Presidential election even took place or before Obama even officially took office.


    The point is that the markets – as they so often do – are able to discount the future into stock prices well before consensus logic prevails in declaring an end to an economic crisis.


    If we look at the S&P/TSX 60 Index (which is comprised of the 60 largest companies in Canada that account for the vast majority of Canadian stock market capitalization), we see that 33 of these 60 companies touched their low points before Obama was even sworn in as President.


    The objective of pointing out these observations is not to advocate one political viewpoint or another. Rather, it is to inject another perspective that is hopefully devoid of political bias and is able to add some objectivity to the debate.


    Another factor we can look at is the TED Spread. The TED spread is defined as the difference between the interest rates on interbank loans and short-term US government debt. In a normally functioning market environment, banks lend funds to each other for short periods of time. But when Lehman Brothers collapsed, fear was prevalent and interbank lending ground to a halt.


    As a result, the TED spread rose quickly. Taking the lead, Bernanke launched unprecedented policy measures in coordination with other major central banks in order to get financial institutions to begin lending to one another again. As fear began to recede, the TED spread dropped.


    TED Spread vs. S&P 500

    (Click on chart to enlarge - Data Source: Stockcharts.com)

     

    While it may not make for good TV on a political talk show, the answer to whether or not President Obama is responsible for easing the panic that had gripped the markets is: “He might have helped but Ben Bernanke and his magic bag of monetary policy tricks deserves the lion’s share of the credit”.


    Having noted the above, it is still not clear what the impact of Bernanke’s measures will be in the future. Some believe that he has helped to create bubbles in other areas of the economy and will eventually result in a spiralling of inflation and the demise of the US dollar.


    At this point, perhaps the pragmatic viewpoint is that Bernanke did what he had to do in the short term by stabilizing the markets. In future, we can only hope that he and his fellow central bankers are equally as successful at ensuring inflation does not take root in the economy.

    Pacifica Partners - Financial Post


    Legal Disclaimer

    This report is for information purposes only and is neither a solicitation for the purchase of securities nor an offer of securities. The information contained in this report has been compiled from sources we believe to be reliable, however, we make no guarantee, representation or warranty, expressed or implied, as to such information’s accuracy or completeness. All opinions and estimates contained in this report, whether or not our own, are based on assumptions we believe to be reasonable as of the date of the report and are subject to change without notice. Past performance is not indicative of future performance. Please note that, as at the date of this report, our firm may hold positions in some of the companies mentioned.

     

     




    Disclosure: none
    Mar 12 7:37 PM | Link | Comment!
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