Is Spain the Next Greece?

The tumbling Euro zone’s fourth-largest economy, Spain, has a towering unemployment rate of 19%, a deflating housing bubble and a budget deficit that is approaching 12% of its gross domestic product. We all know that Greece has sparked fear into the minds of countless global investors, as bond and equity markets get rattled on any news of Greek debt default. However, it could now be Spain that adds fuel to the fire in Europe.

According to the WSJ article by Stephen Fidler, the main problem for weak Euro-zone countries is that as a result of their involvement in the Euro they lack the ability to manipulate their currency or artificially set interest rates. In other words, Spain cannot devalue their currency to make exports more attractive and its “sunny beach resorts cheaper.” Since 1999, these monetary policy decisions have been made at the European Central Bank in Germany, making any thoughts of a global currency absolutely preposterous.

Of course, Spain could attempt to stimulate growth via fiscal measures, such as cutting taxes or increasing spending, yet stimulus spending has already been enormous. Just like our leaders did at the outset of the financial crisis, Spain’s economy minister said in an interview, “The fundamentals of our economy are solid.”

If they turn out to be anything but, it would be far costlier for Germany and France to provide a backstop, as they have pledged to do for Greece already. It’s clear that Spain has many options, yet this process can take a long time to unravel.

Worrisome Housing Market for 2010

With the rest of the economy seemingly entering recovery, the ever troubled housing sector is lagging. Indeed, home prices and buying activity are increasing, but only with respect to a devastating 2009.

Some economists believe the housing sector is bottoming out. Such assertions are based on the fact that in the first quarter of 2009, S&P’s Case-Shiller National Home Price Index had dropped 19% from the year before. In the last quarter of 2009, the same index dropped only 2.5% from the previous year (released on Feb. 23), a promising statistic for many. However, one must consider how much of an influence government intervention has had on such statistics, as well as the imminent withdrawal of government support in the housing sector during the coming months.

As we all know, the U.S. government has bent over backwards for the housing market in the past year. To lower mortgage rates and mend other financial markets, the Federal Reserve has bought over $1 trillion worth of mortgage backed securities. In addition, Congress approved a widely popular $8,000 “first time home buyer tax credit” to generate more buyers for the market…

Thus, the housing sector has shown improvement (with the government holding its hand) since the beginning of 2009, but will this re-growth carry on through 2010? Highly debatable. The Fed’s mortgage buying will cease by the end of March, and the first time home buyer tax credit expires at the end of April. Without government support, it’s hard to believe the housing sector has the capacity to not only stand on its own, but grow. In addition, other factors will hinder housing market growth such as a roughly 10% unemployment rate, the flooding of the market with an unwanted supply of newly foreclosed homes, and the lowest consumer confidence (as of Feb. 23) since April, 2009.

Only time will tell the fate of the housing sector in 2010. Until then, speculation shall rule. However, if the government isn’t ready to catch a falling housing sector halfway through 2010, total economic recovery may stay out of sight.


Alan Shaw
Group 2

Private Equity Eyes the East

With the announcement that the Carlyle Group, the Washington, D.C. based
private equity firm with strong ties to the Bush's, Saud's and the global
power-elite, announce its plans for a new yuan-denominated fund, everybody
took note. Foreign PE wants a slice and and sees yuan-denominated funds as
a way to gain competitive advantage in the Chinese markets which heavily
regulate foreign capital. Some view yuan-denominated fund raising as a
silver-bullet solution to both the myriad of regulations that govern the
use of foreign capital as well as the desire to gain exposure to the
break-neck pace of growth in the Chinese economy which grew 8.7% last year.

Carlyle isn't the only one who wants a piece of the pie, Kohlberg Kravis
Roberts & Co (KKR) and Texas Pacific Group (TPG) announced yesterday that
they are in talks to jointly acquire China International Capital
Corporation (CICC) from Morgan Stanley. Whether or not they will
successful against the heavily favored by regulation and well-connected
local competition remains to be seen. However, one thing is for sure,
there is no shortage in demand for gaining access to the Chinese economy,
which has continued to rapidly develop while the developed word has
stagnated in the aftermath of the financial crisis.

Authored by Stephen Balaban

Greece Update

Greece has just delayed its bond sale, as it negotiates with the EU on budget targets a Bloomberg report stated. The nation is likely holding out to garner some concessions regarding the proposed spending cuts its neighbors are trying to enforce. Greece intends to reduce its budget deficit by 4 percentage points this year, and return it to the 3 percent limit set by the EU sometime in 2012. It is anticipated the nation will sell $6.8 Billion in bonds as early as next month.


Greece is struggling under its current debt, and is making every attempt to borrow at reasonable levels to meet its current needs. 20 Billion of redemptions are anticipated by the end of May, and the country is estimated to need at least 53 Billion more Euros through the course of the year. If no progress is made, Greece may have to seek funding from the IMF in mid-March. Without a guarantee from the EU, it is estimated that Greece will have to offer a premium of over 400 basis points to German bunds.



http://www.bloomberg.com/apps/news?pid=20601087&sid=aEyJBXEF0zjw


Group 6

What Should We Learn from Wal-Mart’s Numbers?

According to Yahoo! Finance, the largest retailer in the world reported a 22% increase in its fourth quarter profit, citing cost cutting and inventory reduction as the main drivers in bottom-line success. However, this only paints a portion of the picture. Although total sales rose nearly 5% to 113.6 billion, same-store sales, which is often a more important measure of customer sentiment, fell 1.6%.

Current CEO, Mike Duke, who’s now entering his second year at the helm, said in a statement that he expects continued strong growth in international markets, but struggles at home in the United States. Unfortunately, many business leaders are echoing similar beliefs: Emerging markets continue to emerge while the United States remains tempered by sluggish economic prospects.

Looking deeper into the results, it becomes clear that top-line declines can be attributed to lower prices across the board, specifically in groceries and electronics. Industry experts are saying that this deflation has had to occur because people who typically shop at Wal-Mart may still be facing dire economic conditions and won’t shop if they believe they are paying more for goods than in previous years.

Although Wal-Mart is trading down today, this may be a good sign for the broader economy. It may be true that people who were shopping at Wal-Mart throughout 2008 and 2009 have decided to shop at higher end retailers and smaller grocery stores. After listening to CNBC this morning (February 18, 2010), Darden Restaurant CEO seemed positive about the prospects of his restaurant’s target customer, who according to his beliefs, make anywhere from 50,000 to 80,000 dollars per year. So, while Wal-Mart may be suffering slightly, there is potential for a broader economic recovery as well.

BY GROUP 8: Alex Harris, Brandon Lebowitz, Kevin Ondyak

The S.E.C.'s At it Again

The destructive force of the 2008 financial recession was nothing to be trifled with. After sifting through the flotsam and jetsam of various companies' and funds' remains, both businessmen and lawmakers are desperately searching for ways to mitigate such disasters in the future. While the primary concern for many on Wall Street has been getting the firm they work for back in the black or clambering out of their fund's BBB rating, the government has decided this is the opportune time to reach it's hand into America's financial affairs. One may ask, "How can the government prevent such recessions from happening again? Hasn't the Fed been taking care of this problem with interest rate cuts, bailouts, and executive compensation cuts?" Yes, but the extent of success has been limited, at least in the short term. However, hen looking around the table of government entities, it is clear that one body has been stepping up their game recently.

That's right, the S.E.C. has become a legitimate force to be reckoned with. Not only have they been making headlines with their massive Galleon Group bust and sizzling snapshots of their ringleader, Mr. Raj Rajaratnam (so affectionately dubbed "RajRaj") doing the perp walk with some blue-coated, Federal agent badasses, but they have also been revamping their internal policies for future crisis control. As an emergency precaution during the later months of 2008, the S.E.C. placed a ban on financial transactions resulting in what is known as "shorting" or "short-selling" in an attempt to control traders' ability to profit on the loss in value of equities and securities.

After the tornado siren had been turned off and the recession was considered "over," it would be safe to assume that financial activity should have resumed a somewhat normal modus operandi. Not quite. The S.E.C. has begun discussing permanent policies to be enacted that would severely limit short-selling on a hush-hush basis, meaning that more transactions will have to be disclosed to the public in order to diminish the sudden and uncontrolled tank in stock prices that often result from large transactions.

This proposed action has many investors in an uproar, including Richard Baker, president of Managed Funds Association. When discussing the negative implications of such action, the president stated, "This independent study demonstrates that recently adopted public disclosure rules in the U.K. have impeded equity market liquidity, decreased trading volumes and interfered with efficient price discovery in affected stocks, driving up transaction costs for mainstream investors and burdening businesses with a higher cost of capital."

Regulators within the S.E.C. are keen on coming to an agreement whether to pursue such action, but at this time one can only speculate how far the government will go to ensure "financial stability" in America.

Gabriel C. Suprise, Group 2

The Market Sell-off

The market has been noticeably more volatile during the last two weeks during a sharp downward trend. But how much of this is reflecting the strength of the economy? The ISM Manufacturing Index, new jobless claims, and UM's Consumer Sentiment are as strong as they have been since 2008, and the fact that the Federal Reserve is becoming relatively more hawkish suggests the economy is strong enough to withstand less monetary stimulus. So where is this volatility coming from? Some possible reasons include uncertainty over how and when the Federal Reserve will tighten monetary policy, the discussion of a international bank tax, and the potential bailout of Greece. Most of these issues will probably take several months, if not years, to resolve.

Group 5

Fed Looking to Withdraw Liquidity

Chairman Bernanke came out today to discuss the possibility to increasing the Fed's discount rate in the near future. The Fed's discount rate, cousin to the more famous Fed fund's rate, is essentially the interest rate at which banks can borrow directly from the Fed.

His raising of the rate would signal that the financial sector is stable enough to operate without any more aid from the Fed, and that upward revision to the Funds rate is on the horizon as well.

In addition, he talked about raising the rate at which the Fed pays interest on bank's required reserves, another measure to withdraw liquidity from the financial system. Taking both actions together, it would seem that Bernanke is bullish on the state of the US economy, and that he is beginning to anticipate, if not take a tougher stance, on inflation.

Group 2

Greece

Talks have begun to develop regarding the idea of other European governments agreeing "in principle" to help Greece. This will most likely come through loan guarantees. It really is the last option as the, "European Investment Bank has ruled out its involvement in a bailout, direct EU aid has been eliminated as a possibility and the European Commission vetoed suggestions of IMF involvement. If Greece is indeed bailed out, it will mark the first rescue of a eurozone member since the currency was launched 11 years ago." Will they follow in the footsteps of the U.S.?

Group 3

WSJ Article

Profiting from Bailouts

Henry Paulson, former Treasury chief, and Warren Buffett believe that the bank bailout was a success and could even turn profitable for the U.S. government and taxpayers. Paulson recently published a book, "On the Brink: Inside the Race to Stop the Collapse of the Global Financial System," defending the government's reaction to the economic crisis. At the Greater Omaha Chamber of Commerce's annual meeting, Paulson, supported by Buffett says, "As bad as this is, when we look back it's not as bad as it could have been." (considering Buffett contributed to helping out some banks). Paulson supports many actions taken by the government in the bank bailout, and believes that Wall Street is corrupt and executive pay packages are too high. Buffett supported Paulson throughout the speech, adding his praise for Paulson, the Bush administration, the new Obama administration, Ben Bernancke, and Timothy Geithner for their actions during the crisis.

Group 3

Yahoo Article