A Eurozone Bond to Compete with Treasuries?

Good day… And a Marvelous Monday to you! Sure seems as though I went from Friday to Monday, as I went out of town this past weekend, and before I knew it, I was driving to work this morning! UGH! There was a rumor on Friday that really sent the euro (EUR) higher, and there was another rumor this past weekend about the Asian currencies… So… Let’s look at those two items – and more, of course – as we begin the last week of February!

Well… On Friday, the euro finally caught some wind its sails after being pummeled all week by the dollar in response to the St. Valentine’s Day massacre that took place the previous weekend. In case you’ve forgotten what I’m talking about here… I’m talking about the news that the Eastern European loan losses had grown to a point that they were causing major problems for Western European Banks that had extended the loans. There were calls for the “end of the euro” and all that… Yes, it’s a very serious thing, but not the cause of a collapse of the euro!

OK… You may recall me saying that as much as I hated saying it, the IMF and Bundesbank needed to come to the rescue. Germany’s Chancellor Merkel, was all “show and no go” in her press conference, and that all left the euro without a bid… But then along came John, Tall walking John, slow talking John… Well, no “John” in particular is involved, but I always got a kick out of that song! Anyway… There was a story on Friday mid-day, that a “Eurozone bond” could be used to ease the turmoil on the financial institutions… Here’s a snippet from Reuters…

“The Chairman of euro zone finance ministers Jean-Claude Juncker has proposed that the common euro zone bond should cover the first 40 percent of the overall euro zone government debt, sources familiar with the work of the Eurogroup said.

“This would be senior debt, guaranteed by the whole euro area, which now has 16 members. Anything above the 40 percent would be junior debt that would be issued by the individual governments.

“The junior debt would most likely be more costly for the government to issue, therefore encouraging a reduction of debt towards the common euro zone level of 40 percent, sources said.

“If agreed on, common euro zone bonds would in a matter of a few years create a highly liquid bond market of some 4 trillion euros which could successfully compete with a similar size U.S. treasuries market for large investors like China.”

That’s HUGE, folks! However, before we all go out to celebrate… There’s opposition to this plan by Germany, who already has about 1 trillion euros worth of German bonds issued… And if Germany balks, this plan will not get off the floor. But, for now, it has put some wind in the euro’s sails.

You have to give the Eurozone ministers some credit for creating something that the likes of China could use as an “alternative” to Treasuries, as Treasuries have long been the only game in town for countries like China and Japan that have tons of cash to invest.

There was another story out this past weekend that I read about last night, that tells of the Asian countries pooling together reserves to back their currencies against speculators. The report called for around $30 billion to be pooled by the Asian countries.

Now, that may or may not be true, but the point here is that this kind of smoke comes from the fire of protectionism… These are baby steps to a full-blown protectionism plan… And you know me, there’s no smoke without a fire, there’s no heat without a flame…

The BIG story this morning, though, is the one that’s going around about Citigroup… Let’s see what the Wall Street Journal has to say about this…

“Citigroup is in talks with federal officials that could result in the U.S. government substantially expanding its ownership of the struggling bank, according to people familiar with the situation.

“While the discussions could fall apart, the government could wind up holding as much as 40% of Citigroup’s common stock. Bank executives hope the stake will be closer to 25%, these people said.

“Any such move would give federal officials far greater influence over one of the world’s largest financial institutions. The proposal was made by Citigroup to its regulators.”

Oh great, I can see the dolts on Capitol Hill all screaming about how this is proof that the United States needs to nationalize banks. Well, let’s see… If they hadn’t already put tens of billions into this bank, maybe they wouldn’t be so ready to try and save it! See? This is what I was talking about months ago, when I said that the government bailing out banks was a very bad thing… But, do you think these guys on Capitol Hill cared to listen then? And they are still not listening… They are dolts! When former Treasury Secretary Paulson came to them and said he needed $750 billion to make things right, these lawmakers didn’t bat an eye, they didn’t question where he got the $750 billion figure, they didn’t ask him how he would account for the spending, or how it would be paid back and when… No, they just followed him like ducklings crossing the road with their mother.

OK… This week… Hmmm… Well, tomorrow and Wednesday we get a double dose of Big Ben Bernanke speaking on Capitol Hill. This is the semi-annual testimony on the economy, which used to be required by the Humphrey-Hawkins bill that expired some time ago, but is still followed by Fed Chairmen. What’s going on nowadays makes a joke out of Humphrey-Hawkins… You may recall the Humphrey-Hawkins Full Employment and Balanced Budget Act, which was put in place in 1978… I’d say the Fed has to do a Lucy… Because “they got some ’splainin’ to do!”

Tomorrow, we will see the S&P/Case-Shiller Home Price Index, which I’m sure will show that the home prices continue to fall here in the United States. Tuesday also brings us consumer confidence. Wednesday will bring us Existing Home Sales followed by New Home Sales on Thursday, and we finish the week and month with a revision to the preliminary fourth quarter GDP, and the Chicago Purchasing Managers Index (manufacturing).

So, we’ve got a boatload of data to go through this week, but the big items are… 1. Is the Eurozone going to issue a bond to rival Treasuries? 2. Is Citigroup going to seek additional bailout funds from the government? 3. Big Ben’s testimony this week 4. An Asian currency fund? 5. Data…

Gold traded above $1,000 on Friday! I saw it trade there with my own one eye! $1,002… But, you may recall me telling you either last week or the week before that while I was sure gold would trade to $1,000, for it to actually stay there would be difficult for the shiny metal, as profit taking would push it back down every time it gained ground to $1,000… And… That’s exactly what happened late Friday, and in the overnight markets last night. Gold saw a ton of profit taking, and has been pushed down to $986… But, I look at it like this… “It’s cheaper today than Friday!”

The Citigroup story has the “risk takers” dipping their toes back into the water, as the “risk takers” aren’t really taking risks these days. They only come out when there are stories about banks being bailed out… But anyway, that’s what they are called, and when they come out to play, the high-yielders like Aussie (AUD), kiwi (NZD), Brazil (BRL), and South Africa (ZAR) get to join in and play too… And this morning, all of these are stronger versus the dollar than they were last week.

The Swiss franc (CHF) hung on to the euro’s coattails and moved higher even in the face of their banking problems, as they would not be a part of the Eurozone bond idea.

Time to head to the Big Finish… Lots of stuff to deal with this, the final week of February! And oil is back above $40… Hmmm…

Currencies today 2/23/09: A$ .6495, kiwi .5155, C$ .8040, euro 1.2840, sterling 1.4635, Swiss .8615, rand 9.99, krone 6.7980, SEK 8.6650, forint 232.40, zloty 3.6550, koruna 22.30, yen 94.70, sing 1.5250, HKD 7.7525, INR 49.68, China 6.8390, pesos 14.76, BRL 2.38, dollar index 86.51, Oil $40.52, Silver $14.35, and Gold… $987.50

That’s it for today… Yesterday morning, my beautiful bride and I had breakfast outside – next to the ocean with a bright sun beaming warmth down on us… Four hours later we were back in St. Louis, where it was 20 degrees! UGH! I made the trek to Jacksonville for the memorial service of our colleague John Kimsey, who would have celebrated a birthday today. I met John’s wife, who said to me…”You must be Chuck. I read your letter every day”. I was also stopped in the hallway by a fellow who said, “Are you Chuck Butler? I read your newsletter every day” So… John must have converted quite a few people to be Pfennig readers! But really… I must be easy to spot, as how many bald, overweight guys are there walking around with a cane, and a beautiful bride? It was good to see a lot of EverBankers that I don’t normally get to see; too bad it was for that reason… And a special thanks to Diane Russell; the dinner was magnificent! OK… Mike Meyer’s here; time to go! I hope your Monday is Marvelous!