29 March 2011

Portugal, Greece and the EURO crisis: What the news are?

1. Portugal
© Markets & Beyond
Despite repeated attacks against the euro, it has rather well survived so far, mainly thanks to the ECB buying PIGS sovereign debt in the open market, the bailout of Greece and Ireland and an agreement reached at the EU Summit in Brussels on March 11 that unveiled a plan to expand the EU bailout fund (the ESM) to EUR 700 billion on a permanent basis, up from the EUR 440 billion EFSF mechanism currently in place that only has an effective EUR 250 billion lending capacity.
However, EU politicians are delaying until June the announcement of details on how it will finance the interim EFSF mechanism that must address sovereign debt issues in the period from now until the ESM goes into effect in mid-2013. This is happening at a time where Portugal Government had to resign.
Portugal has long been the next in line since the crisis publicly emerged in 2010: Last week Prime Minister Jose Socrates had to quit following his defeat before the parliament over a third round of austerity measures did not trigger a wave of euro selling beyond a short lived small dip. From what I read, Portugal can match EUR 4.5 billion of debt becoming due in April; things might be more difficult for the EUR 4.9 billion due in June at a time when the next election should take take place. As a consequence, rating agencies downgraded Portugal and CDS increased. A bailout of Portugal would require ~ EUR 70 billion.
June looks like a key month, if markets wait until then, which I doubt. However, always watch interest rate differentials (real or anticipated) with the USD which are currently supportive of the euro.
PIGS economies are at best anemic and I do not see how long they can sustain high unemployment, high interest rates and negative growth without bond investors having to pay their share of any debt rescheduling (in essence debt rescheduling is what is happening with Greece right now: interest rates lowered by EU Finance Ministers and debt maturity lengthened; this is a bailout that will be paid for by European taxpayers).
2. Greece
It is always interesting to look at number beyond the large prints shouted at the media by politicians.
“According to the data available for the State Budget execution for the two months January – February 2011, on a fiscal basis, the State Budget deficit is Euro 55 million lower than the target set in the 2011 Budget for the first two months of the year. The two first months 2011 State Budget deficit amounts at Euro 1,024 million compared to a Euro 1,076 million target.
The 2011 State Budget deficit has grown – as expected – by 8.5% compared to the 2010 deficit during the same period, as a result of the non repetition of some measures as well as the higher than projected GDP decline during the last quarter of 2010, which has been recently revised for the whole year by ELSTAT.” [emphasis mine]
Down the press release, the explanation is given for this good performance despite a worse than expected economic situation and decreasing tax receipts.
“Public Investment Budget (P.I.B.) revenues increased by 354.5% and P.I.B. expenditures declined by 67.9%”
After all, nothing really abnormal, good management; well, look at the table below:
One will notice that this good performance comes from the PIB deficit that turned to be positive: since I started to look at the Greek Budget (2009), this item has always been negative but for one month in 2009 and 2010 -for figures rather meaningless- and suddenly it becomes hugely positive when headline numbers are awful (revenues substantially down at - 9.1% and expenditures up at +3.3%) and well below what was planned. If one compares the actual number to the target, we are totally out of line: + 604 x for PIB revenues and -70% for expenditures!! They either got their math wrong or it smells manipulation; the PIB item is quite easy to manipulate (just postpone investments and cash in revenues ahead).
Let see whether this rather long quite period for the euro will last much longer (probably a bit since markets still anticipate a rate hike in the eurozone).

Greek Ministry of Finance: State Budget Execution
Markit: CDS market summary

Saxo Bank:  The EU and the siren song of the expected outcome

                        CDS 5 yr cost and PIIGS 2 yr yields

Bloomberg: Portuguese Bonds Slide as Prime Minister Quits on Budget, Fitch Downgrades


16 March 2011

Uranium: follow-up

© Markets & Beyond
Uranium shares were hammered Monday and Tuesday following the nuclear crisis in Japan and its consequences in the world for the nuclear electricity generation as a whole.
This is chilling people (therefore politicians in the West) and, as for the Three Mills Island and Tchernobyl accidents, the anti-nuclear lobby is becoming more voiceful and media start to listen.
  • In India, the Minister (whoever he his) in charge of the nuclear industry said that the design of nuclear plants will need to be reviewed (Areva is building 2 there).
  • In France, ecologist are calling for a referendum within the next 2 years and undoubtedly they will use this for the local elections next week et the following
  • Gemany’s Merkel called for a 3 months moratorium on expanding the life of old nuclear plants.
Let’s pause and reflect. Beyond the weak links (Germany, Switzerland, probably some other Northern European countries and the Obama’s Administration), the leading nuclear countries reaffirmed their commitment to the nuclear industry (France, fast growing economies) – have they any sensible choice anyway. I even do not see Japan renouncing to the nuclear electricity. After all the Fukushima nuclear power station sustained the earth quake perfectly; it is the tsunami’s wave’s height that was higher than the plant was designed for and caused damages to the cooling system. In addition, from what I read (intox or reality?), the Fukushima reactors are from an old GE design (1960s…) much less robust than recent designs. As reported by the NYT:
“But the type of containment vessel and pressure suppression system used in the failing reactors at Japan's Fukushima Daiichi plant is physically less robust, and it has long been thought to be more susceptible to failure in an emergency than competing designs.”
The question I am asking myself is: what could replace nuclear energy in the 20 coming years to meet demand? I do not see any but (1) increasing the consumption of fossil fuel (coal and natural gas in particular - green energies will only represent a fraction a requirements), (2) a technological breakthrough or (3) a substantial reduction in demand. 
Today, (1) is the most likely alternative if the nuclear industry growth was to be phased down, which I do not expect but if the Japanese problems turn out to be a nuclear disaster; even so, I doubt China and other fast growing economies will stop their programs beyond rhetoric toward the population to alleviate their fears. In the West, it may be different in some countries, but I do not see the main nuclear ones to shift away from this source of energy (France not being the least).
If one believes my "optimistic" (realistic) view of the nuclear industry, the coming days may provide great opportunities to buy good uranium mining companies as well as others involved in the nuclear chain.
In any case, contracts are long term by nature and due to the time horizon from the start of building a plant to its completion, the collapse of uranium share prices (up to 50% in 48h for most junior and intermediate miners), including Cameco (-24% at its lowest Tuesday compared to Friday’s closing), the leading one, is unjustified in my opinion when compared to fundamentals.

Disclosure: This was written to my Partners at P&C on Monday and updated/completed Wednesday at Australia’s closing.


The New York Times: Experts Had Long Criticized Potential Weakness in Design of Stricken Reactor


13 March 2011

Chart of the Day: Family Home Price/Gold

An interesting chart showing US median family home price in gold: today it takes 120ounces of gold to buy the median single-family home vs. 601 ounces in 2001, 80% down from the peak and near it previous trough in 1980. Markets tend to overshoot however and I expect this ratio to significantly decrease. We probably are in for a 35-40 years cycle before it rebounds.
Chart of the Day: Median Single-Family Home Price / Gold

09 March 2011

The Seven Immutable Laws of Investing

A down to earth paper on investing from James Montier of GMO, full of common sense, far away from all the mathematical/statistical models that failed so badly during the financial crisis.
GMO is a top notch value investor.
Grantham, Mayo, Van Otterloo & Co (GMO): The Seven Immuable Laws of Investing – James Montier, March 2011