Beauty and the Beast: Chile, Ukraine and the PIIGS

by: Wall Street Strategies

You know it says a lot when a country that has lived with communism and socialist economics votes against arguably the most attractive politician on the planet in favor of a platform that includes tax cuts to pull it out of recession.

Of course, the outcome of the election in the Ukraine could go on for days, but I think that it speaks volumes, and I bet we will see sweeping election shifts in Europe as these nations come to grips with the fact that there is a limit to how much governments can do through borrowing and taxing its citizens and businesses into submission. The vote counting continues, and there will be legal maneuvers, but the message is clear...there is nothing sexier than lower taxes.

There was an election held on the same exact day halfway around the world from the Ukraine. Yes, this shift away from leftwing politics isn't an isolated occurrence. Just last month the rightwing conservative candidate won election to the presidency of Chile, ending the leftwing rule in place since 1990. Here is a nation that has tremendous riches from copper (prices up +140% in 2009) and yet felt the need to get a businessman to enhance prosperity. Billionaire Sebastian Pinera made his fortune introducing credit cards to Chile. Credit cards, could you imagine anyone from that industry, let alone a pioneer in that business, running for any office in America? Mr. Pinera promises to be tough on crime and create a million jobs (as opposed to saving jobs...I hope).

Interestingly, Chile isn't the economic basket case of its socialist cousins in Europe, where double-digit deficit to GDP figures loom like giant anvils over the continent. According to EDC, Chile's deficit to GDP was 4.2% or $7.22 billion at the end of 2009. GDP probably declined 1.9% in 2009, and should rebound to 2.3% growth this year. The country put forth a stimulus program of $4.5 billion or 2.8% of GDP. Their plan required private banks to lend money. According to the CIA, Ukraine's GDP declined 14.1% but could rebound 3.5% in 2010. Inflation is running rampant, however, at 16.5%. These countries possess great resources and their citizens should be better off, which is why they voted the bums out.

In the meantime, the so-called PIIGS (Portugal, Ireland, Italy, Greece and Spain) continue to weigh on financial markets around the world. You know I read over the weekend where some firm, I think Barclays, has prohibited its analysts from using the PIIGS acronym. I guess not using the term is the same as putting lipstick on the problem. Oh boy, political correctness in the eye of the storm. The fact is that there would be a few pigs that would take exception to being associated with the slop.

Yesterday, CDS rates rallied to record highs for Portugal, Spain and Greece.
The stock markets in these nations continue to freefall as well. Note: PSI 20 is the Portuguese Stock Index, ASE 20 is the Athens Stock Exchange, and IBEX is the index from Spain. (Click to enlarge)

Our market wasn't so hot either. Early resolve gave way to some sort of capitulation. It wasn't a textbook retreat as there wasn't a ton of shares and the market wasn't down 5% or more, but make no mistake investors gave up yesterday. When the market gets into these grinds, each day can seem like a week and losses are mentally magnified. I think that the selling is overdone, but the angst doesn't go away. The White House is spoiling for a televised fight with the GOP on healthcare after shutting them out all throughout the entire opaque backroom haggling. Investors need to hear good news and get the sense that sanity will eclipse political shenanigans. In the meantime, closing under 10,000 on the DJIA isn't going to help morale; although it's not a number of importance with respect to technical points of view it does get the attention of many casual investors.

Last Thursday I walked into my favorite diner around 3:00 in the afternoon and the owner walked out the back and told me he just sold half of everything. The guy has a good feel but he is very emotional and sold much at last year's lows. He is also something of a poster investor for the thinking of the masses. This creates a problem, sell with the crowd and feel good when those stocks move a little lower or hang on and smile when stocks bounce. I will say that each day we get fewer answers from the government, which makes it much harder. Right now we are betting on the business cycle and the U.S. economy versus the anti-business government desperately trying to cram their agenda before they lose any more power.

Disclosure: None