WASHINGTON, June 29, 2015 – Wall Street opened up sharply this morning, apparently in an optimistic mood but with little evidence to support it. Proof: Just moments ago, Reuters reported “Germany’s Merkel says before the planned Greek referendum is conducted we will not negotiate on anything new…”
This builds on yesterday’s gloomy reports—the ones that dropped market averages roughly 2 percent into the red and may very well keep stocks in the dead zone for at least another day as the fundamental unseriousness of the Greek Communist government becomes abundantly clear to anyone who isn’t brain dead.
A ZeroHedge run-down on news yesterday included the following key observations:
Earlier today, as the exchange between Greece and its creditors got increasingly belligerent, Estonian Prime Minister Taavi Roivas told public broadcaster Eesti Rahvusringhaaling in an interview that a possible Greek decision to leave euro area wouldn’t soften stance of other EU countries and that Greece’s debt would still remain outstanding and creditors would expect this money back.” [Bold text ZeroHedge.]
If Greece leaves, the value of their new national currency would decline very fast, so their solvency would still worsen further. They will either have to cut spending or improve their tax revenues. There are no other options.
So did this latest antagonism change the Greek mind? According to a flash headline by the WSJ released moments ago, not all. In fact, Greece just made it official that it would default to the IMF in just over 24 hours.
Making matters more grim for the intransigent Greek government, those skulking S&P rating gloomsters decided to pounce this morning as well, downgrading four Greek banks and sending them to the fiscal dunce corner, as one can easily see by reading the following S&P narrative excerpts, datelined Milan, Italy:
Standard & Poor’s Ratings Services today said that it has lowered its long- and short-term counterparty credit ratings on Alpha Bank A.E., Eurobank Ergasias S.A., National Bank of Greece S.A., and Piraeus Bank S.A. to ‘SD’ (selective default) from ‘CCC/C.’ We have also lowered our issue ratings on the banks’ senior unsecured debt to ‘CCC-‘ from ‘CCC.’ We have affirmed our ‘C’ subordinated debt ratings on the four institutions.
For readers not intimate with bond and debt jargon, anything carrying a “C” rating at any level is regarded as “junk” by the investing community and thus far too risky for the average investor.
Reasons given by S&P for its actions:
On June 28, 2015, the European Central Bank (ECB) decided not to further increase the emergency liquidity assistance provided to Greek banks.
On June 29, the Greek government imposed capital controls and limits to deposit withdrawals, and announced banks will remain closed until July 6. — We are therefore lowering our counterparty credit ratings on the four Greek banks we rate to ‘SD’ (selective default).
We are also lowering our ratings on the banks’ senior unsecured debt to ‘CCC-‘ from ‘CCC.’
The ratings agency sums it up this way:
The downgrades to ‘SD’ follow the measures introduced by the Greek government on Monday June 29. Specifically, these include limits to deposit withdrawals, the closure of bank branches for a full working week, and the prohibition of money transfers out of Greece unless authorized by the Greek Ministry of Finance. The rating actions reflect our opinion that private individuals’ lack of access to their deposits on a timely and in-full basis, and the constraints to their ability to transfer funds, constitute a selective default under our criteria. Our downgrade of all outstanding senior unsecured notes to ‘CCC-‘ reflects our opinion that it is now inevitable that Greek banks will default within six months in the absence of support from the EU authorities; we do not anticipate such support will be forthcoming….
We view the banks’ liquidity positions as having weakened further after these recent events, which we see as constraining the banks’ ability to meet their upcoming financial obligations, when due. We therefore believe the default of the Greek banks is a virtual certainty unless unexpected additional external support materializes. As such, we have revised down our stand-alone credit profile for all the four Greek banks to ‘cc’ from ‘ccc-.’
But wait! There’s more! While the Greek problem is nerve-wracking for investors, another nasty scenario, buried for months by the media, began to rear its ugly head this weekend. That’s the Greek-similar yet arguably far worse situation in the U.S. Commonwealth of Puerto Rico.
With vastly larger amounts of iffy municipal debt at issue—debt held, BTW, by tens of thousands of American investors via numerous muni-bond mutual funds—the likelihood of a Puerto Rican default is significantly more troubling than Greece on this side of the pond.
As in Greece, if one examines the situation rationally, there is no realistic way the island Commonwealth can ever hope to repay its mass quantity of indebtedness which, again as in Greece, has largely been incurred by an overly large, overly well-compensated and drone-like public sector that has gradually robbed the declining private sector of its ability to earn actual, taxable income.
With Puerto Rico apparently coming to a head just as the Grexit thriller reaches a climax in the Eurozone…well, it’s kind of like a B-grade horror film promo come true: Be afraid. Be very afraid.
Investors certainly are, and it shows in recent nervous trading. We’ll have more to say about Puerto Rico when we can gather more credible information on this building story.
Today’s investing tips
Pretty much the same as yesterday’s. If you get any opportunity, you may wish to open or add to hedges you’ve placed against what stocks remain in your portfolio with the double-short S&P 500 ETF, symbol SDS. The tamer regular short ETF (SH) is not as volatile, but it doesn’t seem to cover your investments as well.
However, beware the risk here. If somehow, negotiators pull a rabbit out of the hat and reach some kind of settlement at the 11th hour, you might have to pull that hedge with amazing speed, which is tough to do if you’re not at home trading on your own computer.
Perhaps foolishly, we’re still nibbling at refiners like Calumet (CLMT) and Valero (VLO) to establish early positions. Likewise, regional banks like KeyCorp (KEY), First Niagara (FNFG) and New York Community Bank (NYCB).
The latter are particularly iffy right now because, if the situations we’re discussing grow worse, the Fed is simply not going to be able to start jacking up interest rates this year at all, given conditions on the ground.
Banks have been levitating a bit lately in anticipation of Fed rate increases which would almost automatically help the beleaguered banking sector find actual profits after nearly a decade, not to mention increase banks’ currently paltry dividends. If a 2015 rate increase is back off the table, this rally either stalls where it is right now, or the banks will engage in a mini-decline once again.
The Maven is inclined to hold his ground on these, in spite of short-term difficulty. Historically, banks coming back from a few bad years take their time doing so, stock-wise. We made good money off a number of these institutions in the 1990s following the unwinding of the S&L debacle. We anticipate we’ll be able to do this again. But it will take a lot of patience, something that’s wearing awfully thin for most investors, including this one, in 2015.