ALERT and Market Update for 5/20/12
We have seen a powerful market sell-off occur within the last couple of weeks due to the very real and powerful European deficit debacle. Most Americans have no idea of the severity of the Euro and sovereign debt crisis that actually exists and how it will affect the world. This stands to reason, because the media is trying to keep this critical issue as quiet as possible for fear of stoking a more serious pullback in the markets than we have already seen.
In a nutshell analysis, here is where the matter stands. On Monday, May 14th, 2012 Greeks withdrew more than $1 billion from their banks in just one day. And in the past week Spaniards withdrew $1.27 billion. On Tuesday, May 15, 2012 ten thousands upon ten thousands of Spaniards protested on the streets of their country attempting to have their government do something about the horrendous economic conditions there. For example, unemployment just soared to 24.4% while there is over 50% unemployment for those under 25 years of age. Things aren't much better in Portugal. Then we need to add Italy (one of the most indebted countries in all Europe) and finally FRANCE. France has roughly 2.9 million people unemployed, the most in 12 years. Consumer spending fell 2.9% in March while industrial production dropped 1.2% in February, the third consecutive month in a row.
Many know that Greece is the suppossed lynchpin to the entire sovereign debt crisis. Yet, Greece holds the smallest sovereign debt of all the countries that are part and parcel to the European sovereign debt crisis. But THEY CAN BECOME THE CATALYST TO A DOMINO EFFECT THAT WILL HAVE THE ENTIRE HOUSE OF CARDS COME TUMBLING DOWN. If Greece goes, there will be billions upon billions of Euros that must be found to bail out the bondholders that are holding the system in a very fragile state. If Greece leaves the European economic community (EEC), European banks could be on the hook for at least $6.3 trillion. What many do not know is the "atomic" effects that this contagion may involve. This major contagion is actually a financial atomic weapon known as derivatives. The largest and most murky of them exist in the banking industry. It has been stated that they exist on the order of at least $200 trillion and possibly higher. If the system collapses significantly enough, critical mass will be reached and potentially bring about a total collapse. The only known antidote to this problem is outright default (which would for all practical purposes mean collapse) or symtomatic relief known as "quantatative easing" (aka: money printing). We have already seen three bouts of quantative easing: QE1, QE2 and the injection of nearly a trillion dollars at years end 2011 in the European banking system by both the ECB (European Central Bank) and America's Federal Reserve. As with an addict, to reach the next greater high, a much greater dose (i.e. more money) will be needed to provide relief. At some point, QEX will no longer work as hyperinflation will totally destroy the worth of any money injected. This is exactly what took place in Weimer Germany from 1907-1921.
What all this means is that the entire euro-zone system is on a razors edge regarding its financial existence. Why? Because the stabilization funds established by the EU are dwarfed by its massive exposure.
Now add our own country (America, which isn't a whole bunch better, certainly not as far as indebtedness is concerned at over $15 trillion dollars) and we are on the verge of seeing a looming climatic global economic implosion on the horizon.
Not only that, U. S. envoy Dan Shapiro and associated officials have just released a press release stating that America, in alliance with Israel, is ready to confront Iran head on militarily. In fact, it was stated that the possibility of a direct military action against Iran is at a higher point that it has ever been. It has been suggested that such a strong comunique has been released as a pressure point to have Iran become serious about curtailing or discarding their nuclear program when the next meetings between Iran and the western nations take place on May 23, 2012 in Baghdad. Knowing how Iran has acted in the past, it is doubtful action will be taken except a mouthful of rhetoric and deceit.
For the reasons noted above, we now believe it is much too dangerous to stay in the market, especially with an emerging market such as Israeli stocks. We are now advising that you close all your positions as soon as possible. The dangers for a continued downdraft in the markets is just too great of a risk. Besides, we believe it is well worth taking a tidy profit from the success our portfolios have brought.
Again, as we have done in the past, we will continue to service the portfolio for any members who wish to stay in the market and take the risks which we are warning towards. However, we hope you will consider taking at least a 50% profit margin at this time and hope you appreciate this lucid and sober explaination.