The Real American Fear: Europe

This is going to be a crash course in the world's debt problems and fears.

The US, like the rest of the world, is undergoing major debt fears. The only reason the US won't default: we have the capabilities of raising our debt ceiling. If we were a part of the EU, you can bet we would be in bailout talks. Because we can print more money and expand our balance sheet, we constantly dodge bullets without ever fixing the problem. It is almost like we are running from it over and over while our leaders fight about where to run to. The weekend we went to the wire on raising the debt limit and the effective downgrade by the S&P caused markets around the world to fall. The global economy has become so correlated that we cannot continue to focus on news from any single country.

Europe could be considered to be in a worse position than the US. The reason is simply because of the EU. The European Union sets one interest rate for the whole zone. Every country is bound by the same set of rules. Some countries are dangerously close to debt limits while Greece has jumped well past it. Greece cannot raise their debt ceiling like we can. They cannot move interest rates or manipulate their currency to help themselves. The EU could be the whole problem to Europe's debt troubles. Unfortunately, some of our banks have a financial interest in Europe's banks and countries. Should these countries default, our financial system could see another major speed-bump.

Recently, a top official in the EU Central Bank stepped down causing further fears about the debt troubles. The most interesting part was the fact that the US markets fell further than Europe's on the news. Why? Why should we get hit more than the countries that this actually impacts? Our biggest fear has to be Europe. Just today the markets rallied back after initial fears because Italy is looking for a deal with China. Sometimes it even seems that our economic numbers take backseat to Europe. The only news we should really be watching seems to be Europe. Until that changes, keep watching pre-market news to figure out how each day will start off.

Solving the Big Banks' Problems

Banks are still under pressure from the financial crisis. They are facing all kinds of mortgage problems while being challenged from every angle on revenue sources. Most have had significant layoffs. Bank of America has talked about laying off 30,000 employees over a 3 year span. I have a big idea that may help these banks out.

During my short career in the banking industry, I have seen very few things. However, one does nothing but disturb me. That is the teller position. Teller jobs should be obsolete. We can make deposits and withdrawals through the ATM. We can pay bills and loans and make transfers through online banking. Even mobile banking is making an appearance. What could banks possibly need a teller for?

If big banks would have ATMs strategically placed around a city with one building for those wanting to open accounts and apply for loans, these banks would see all kinds of revenue. They would save money through utilities, real estate, buildings, and employees. The downside: the layoff of tellers. I guess we are back at square one. Banks will continue to have problems. There is no hope.

Bonds: Still a Safe Haven?

Treasuries have been a consistent theme in the news over the past month. Talks about a possible US default have kept bond-owners on edge. Any potential default means that they would not get paid for their coupons. Even though Obama has signed the debt deal, bond-owners are still worried about a possible downgrade on US debt by ratings agencies.

Europe has been a point of focus for debt talks and downgrades for the past year. We have seen many countries have their sovereign debt rates spike as downgrades have pushed some countries to junk bond or near junk bond status. Curiously, interest rates in the US got punished as bond prices soared as the debt deal went through. There are two main reasons of why this happened: poor economics and credit rating.

We have seen a lot of poor economic numbers in the past couple weeks from around the globe. This has led many to buy up Treasuries as they seek a safe shelter. As a result, bond prices have been bid up and rates have fallen. With the debt deal passed and the debt ceiling raised, chance of a default are slim. The lingering fear is a concern about a possible downgrade. Though this might be a very viable possibility, the US would only fall to a AA rating. This isn't exactly a terrible rating or one the would automatically demand a sudden increase in rates. Fitch has been the only company to comment as of now. They're not changing their current stance on the rating but might soon if no changes are made.

US Treasuries continue to be a safe haven as worries about the global economy resurface. The current debt deal has not had the impact that some thought it would. Should the US not change anything fiscally, ratings agencies could downgrade US debt. This wouldn't cause rates to spike although we should expect to see some type of rate increase. For now, bonds continue to be the safest place to be for the short term.

I'm Back...Right Where I Left Off

It has been a year since my last post. I just couldn't stay away any longer given the amount of variables that keep popping up helping to hinder economic and financial growth. My last post was about how Europe fears will linger in the market for a while to come. Amazing how that is still the case given how Greece is still on the brink of default with a few other countries also having financial troubles. We are seeing the same problems over and over. They take a few weeks or months off and then reappear. Investors, with our short term memory problems, tend to forget about these problems when they temporarily disappear from the markets.

Yesterday was the largest of a long strings of losses for the markets. I, along with all other investors, have felt the discomfort of losing money day after day with no end in sight over the past week and a half. I have made the same mistakes that I have sworn to never make again. I revamped my portfolio a few weeks ago when things seemed to be looking up; however, I didn't include a couple of key things. I kept almost no available cash for any drops in the market. I also did not set any limits. Had I set limits, most of my holding would have sold off allowing me to then have available cash to buy back at a lower price. I would have been a lot better off with either of those things. I didn't necessarily have to have both to be fully covered.

The only reason I am not as worried as I used to be is because of a longer term view I have taken on. I have seen a lot of companies I have sold, after either making or losing money, go on to rise a lot further. Some have fallen a lot further making my selling ideas seem genius. The question is what has continued to go up and go down? Larger, value companies keep going up. It may not be quick or continuous. It is, however, filled with dividends that make up for a month of no return. The ones that tend to go down and keep going down are smaller, growth based companies that are mainly technology based who keep missing earnings forecasts. I am not worried because I have filled my portfolio with mostly large cap companies with great dividends. Even though they might be falling now, I see dividends popping up in my account making me remember why I bought these companies. Even midcap companies that I have invested in have a small dividend package. Although I may not have kept my two key ideas of keeping cash and setting limits, I have invested in dividend based companies giving me a reason to not feel as worried as I would have been.