Martel

Are Baltic Countries the Next Black Hole?

Estonia is less on the brink of devaluation than six months ago. In pursuing a membership in eurozone, Estonians have actually walked the talk. Less so with Latvia & Lithuania.

Currently the official line in Estonia is that euro will bring stability and foreign investments. The problem with this is, Latvia & Lithuania will likely devalue or float their currencies later on, thereby gaining a sizable edge vs. Estonia with euro. The stability of eurozone could turn into a stability of a 'permanent' recession.

It would not be beyond the capabilities of the EU to bail out the Baltics, in case the situation gets very, very bad. Better that, than letting them slip back into Russia's sphere of influence.

Recent History Proves Western Investors Should Avoid Putin's Blandishments

In Russian talk, "seeking stable and long-term partners" means they would like to find investors who, for a long time, don't ask where their money disappeared.

Written contracts, even if your counterpart is the 2nd largest city in Russia, don't mean a thing. A case in point: www.hs.fi/english/arti...

In Russia, if somebody powerful thinks you've got money, they'll find a way to take it. Even if you have the law on your side. A case in point: www.hs.fi/english/arti...

One of the worst fleecers is the Russian state. They'll make it convenient for you to get in, but once you're in, they'll change the laws and you're trapped. This might apply to the 'Arctic investments partnership' as well.

I'm not saying there are no opportunities in Russia. It is just that foreign companies might not be able to profit fully from those opportunities, because some other people want that profit. Many of those "other people" are part of the FSB/oligarch-kleptocracy, so they have the officials and police on their side.

Trying to Move Turkey Away from the Russian Sphere of Influence

"The EU, as a hidden fact, hates and fears Turkey with its population's, youth and vigor (and promise) as an economy."

Perhaps because of political correctness, you forgot the main issue, which is religion. According to the American historician Bernard Lewis, before this century is over, Europe will be Islamic. Now, do we want to speed things up, by allowing Turkey's soon 70 million people to join Europe?

I wish the Turkish people well, and am completely willing to invest there myself. However, regarding the issue of Turkey's EU membership, both the Turkish people and Europeans would probably be happier living separate. A membership in the EU puts a lot of cultural pressure on Turkey as well and, historically speaking, this has always created a backlash. Already now a relatively sizable part of the Turkish population subscribe to hardcore forms of Islam, although the moderate Muslims, such as Alevites, can also be counted in the millions.

Europe is not like the U.S., which was a country of immigration from the very beginning. Here there are all kinds of issues of peoples and nations, both in good and bad. Some problems have roots that span centuries, and people have long memories. The outcome of Turkish membership in the EU might be very different from what you guys on the other side of the pond may think.

But why not accept Turkey as the 49th state in the U.S. of A?

Two Ways to Invest in Ukraine

One problem with Ukraine is that it is torn between Europe and Russia in terms of economy, culture and language. Russia does not want to let go its former satellite, and also many Ukrainians feel close kinship towards Russia. Then again, many would like Ukraine to become 'a normal European country'. An additional hurdle is the Soviet mentality, which is unfortunately still present everywhere in Eastern Europe. That will change, but it will take longer than many expect. There is a lot of potential, but that market is not for widows & orphans.

The Ukrainian market is relatively big in terms of people, but not yet in terms of purchasing power. With its 45M people Ukraine generates a GDP similar in size to Sweden (9 million people).

"Most of the larger companies in Ukraine are traded through Pinksheets only or are listed on European and Russian exchanges."

True. Talking about grain operation companies, if you have access to Scandinavian stocks in the OMX Nordic Exchange, you could buy agribusiness companies like Trigon Agri and Black Earth Farming. Both are Western companies, with Western management. Trigon Agri operates in Ukraine, Russia and Estonia, while Black Earth Farming only in Russia.

Nokia Netbook Can't Turn Out Well

"I don’t see how Nokia will have an advantage on scale, innovation, features, branding or distribution..."

Yes... WAIT... did you say 'distribution'? So Nokia has no advantage in distribution? Gimme a break, will you. Nokia has a very good relationship with carriers. Many of those carriers, besides selling Nokia phones, also sell mini laptops. Like Swiggs already mentioned, this has probably been asked for by carriers. This is a win-win situation for both parties, and also for Nokia's subcontractors in Asia.

Carrier subsidies will bring the price down to more affordable level. Nokia will use Ovi as an additional sales point; something that not all mini laptop manufacturers can offer. Nokia has sold over billion mobile phones, and it is far more well-known and trusted brand than, say, Asus.

The 'booklet 3G' won't be a landslide victory for Nokia, but it is a smart and necessary step. Also, the border between smartphones, internet tablets, mini laptops and eReaders is getting thinner, so prepare for more of the same.

Latvia: Why Should We Care?

"Did anybody sit those Latvians down, and explain to them that they would be exposed to foreign currency risk? Was there any reasonable way for them hedge their local currency?"

Both Latvians and Estonians could take their mortgages in local currencies, Latvian Lat and Estonian Kroon. However, the interest rates on those is a bit higher, so about 80-90% of Estonians have their mortgages in euros.

The same thing happened earlier in Iceland. It was just just too tempting to borrow in other currency than their own. In addition, the local banks went wild with carry trade, buying foreign assets with yen etc. denominated loans. The central bank certainly did not have any risk control in place. In the end, their currency went bust. It still exists, but with a completely artificial rate of about 170 ISK/EUR. The last free market quote from EU banks was about 290 ISK/EUR. If you check their real estate prices - in fact any prices - they're still far from inexpensive, even though the economy is toast.

However, Iceland is an extreme case. The Baltic countries are in a better situation. Estonia, for example, is with almost no international debt, their taxes are relatively low etc. They'll survive. Their major long-term problems are with demographics and Russia.

Latvia: Why Should We Care?

"When the mortgages default, creditors take the houses and sell them for market prices. That puts new owners back in them, and hands large losses to the lenders. "

True, and I must add that in Europe you don't walk away from a mortgage. It's your mortgage until you have paid it back. Bank takes your house? You still owe them money.

This has practical implications for the economy. People bought their houses at bubble prices, their houses will be confiscated from them at rock bottom prices, but their EUR mortgage has grown +30-50% because of devaluation. Unemployment is growing fast, I should add. Luckily at least Estonia has personal bankruptcy laws, because this is the kind of stuff revolutions are built of.

Latvia: Why Should We Care?

That was a good article, and avoids the kind of factual mistakes that often abound when foreigners venture to write about tiny distant countries (I live in Finland - not a neighbor to Latvia, but nearby).

If Latvia devalues her currency, Estonia is next, and probably also the third Baltic country, Lithuania. The situation in Estonia is very similar to Latvia, except devaluation requires changes in legislation. Perhaps though, in a pinch, they could do that over a weekend.

Real estate prices in the Latvian capital Riga are down about 50% y.o.y., but not especially cheap yet, considering the local income level. That tells something about the magnitude of the bubble. With a devaluation of, say, 30%, one could find bargains, but the country itself is not that attractive with its demographic problems (aging population, a sizable Russian minority).

Latvian Gross Domestic Product is down 18% y.o.y. Almost similar development in Estonia. In both of them, the real estate bubble was financed by mortgages from mainly two Swedish banks, Swedbanken and Skandinaviska Enskilda (SEB). The former is traded in the Stockholm stock exchange, and could form an interesting but risky play when the situation unfolds. It already had a strong rally from the bottom of SEK 20 to 60, but has slipped back to SEK 37/share.

I don't think there is a way for the Baltic countries to avoid devaluation. Neither should they try, but just float their currencies. Right now they're still better able to take the blow, than e.g. next year this time. The path followed thus far, 'internal devaluation', only brings increasing unemployment and social problems.

Latvia could be the first domino to fall in Europe. Iceland quite wasn't big enough to move the other dominoes. The three Baltic countries could set in a turmoil, bringing up to the surface many things; East European exposure of Austrian and Swiss banks; the real estate bubbles in Spain, Ireland etc; internal tensions in eurozone etc. There are so many shoes yet to drop.

Apple's Media Tablet Will Cause the Stock to Rocket

One difference between the iPhone and Media Tablet is that the iPhone took the other manufacturers by surprise. It really did not have a competitor available immediately. Media Tablet, on the other hand, does face some tough competition already.

For example, Nokia has lowered the price of their N810 Internet Tablet to only $220. It is a feature-packed product and can e.g. run Google Android. There's an existing online sw developer community, Maemo, for N810 and it's predecessor N770. Moreover, Nokia has already promised N810 won't be last in line, so they probably have something in the pipeline already now.

While Apple's products sell like hotcakes in the U.S., worldwide the situation is a bit different. It seems that in India, for example, Nokia's N5800 touch phone trumped the launch of iPhone. In China the iPhone will probably sell well, though. My point is: the honeymoon is over, the competitors are awake. Thus it will be very difficult for Apple to repeat iPhone's success with Media Tablet. The share price might go up for other reasons, but the income stream from Media Tablet might disappoint.

But let's wait and see what they come up with.

Gold Set for Huge Rally

$1,000/oz. this week? No way, not even this month.

We are still within the correction pattern that began in March last year. I do believe the next very large move is upwards, but before that we could just as well go below $800/oz. to see how the gold bugs like it.

Gold going up isn't a problem for most of us. Instead I would prepare myself mentally for the situation where it drops below the recent lows and continues towards $800/oz. Do you sell, or sit it out?

What Happens to the U.S. Economy and Market if Thailand Falls?

"...since the beginning of 2009, Iceland, Latvia, Czechoslovakia and Hungary have seen their governments step down..."

Czechoslovakia ceased to exist in 1992. At that time, they split into two independent countries, the Czech Republic and Slovak Republic. It was the Czech gov't fell at the end of March.

I don't think yet another change of Thai government would damage the U.S. economy. It may be bad for Thai democracy, but thus far even the Thai stock market hasn't suffered. At the current level, the Thai stock market is a buy, along with some other Asian markets.

We may be heading towards more politically turbulent times, though.

What Sweden and Its ETF Are Getting Right

Two Swedish banks, Swedbank and SEB, more or less themselves financed the consumption party and real-estate speculation boom in the Baltic countries. Prices of apartments in Baltic capitals rose to the level of their Nordic neighbors, even though their salaries and purchasing power are only about half of that of the Scandinavians. Not much money went into creating viable industries. A lot of money went into leasing cars and equipping posh newly constructed condos with jacuzzis.

The Baltics have priced themselves out of the competition. Their currencies are about 30% overvalued. Those currencies are pegged to the euro, making the situation worse, since most of their neighbors' currencies have weakened. Their politicians refuse to discuss the currency peg, and instead try to get on a fast track to eurozone, "to bring stability". There has been some attempt to cut government spending and lower salaries - notably in Estonia, but less so in Latvia. Anyway, these attempts will fall short in the Baltics, just like they have fallen short elsewhere in the world in similar cases of debt-induced boom combined with a pegged currency.

It is in this situation Sweden has decided to throw bad money after the good. Most of the mortgages in the Baltics have been tied to euro, instead of national currencies. So, in case of devaluation, defaults on those mortgages can hit 10%. But if the Baltic currencies are not devalued, growing unemployment and lower salaries will bring the default rate towards 10%. The Baltics are damned if they do, damned if they don't - and likewise Swedbank and SEB.

Those two Swedish banks will be hit, and this has been reflected in their share prices. In the end, it is the Swedish taxpayer who will pick up the bill. One could, however, question the competence of the management of those Swedish banks, since this is the 2nd time in 20 years the very same banks are in a similar situation.