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European Debt Dominoes Continue Top Tip! Immediate Steps to Avoid Losses …

Interest-Rates / Global Debt Crisis Jan 14, 2011 - 07:59 AM GMT

By: Mike_Larson


Best Financial Markets Analysis ArticleDo you remember Baghdad Bob from Gulf War II? He was the Iraqi minister of information who kept pledging that the U.S. was being routed and our troops were nowhere near Baghdad … even as they were marching through the streets. The colorful denials made for great entertainment.

Now the same theatre of the absurd process is playing out in many of Europe’s major capitals.

First Athens — and then Dublin — pledged they didn’t need a penny of aid from the European Union or European Central Bank. They said they could pay back their debt, no problem, even as their bond prices were plunging and interest rates were soaring. The bailout denials kept coming and coming … right until the fateful day when they threw in the towel and begged for the money!

Soon, the next domino in the chain is going to fall. Then the next after that. If you’re an investor exposed to the risk, you need to get out of the way.

I’ll tell you how in a minute. But first, let’s lay out the daisy chain of events to come …

Portugal Next; Then Belgium? Spain? Italy?

The focus this week has been on Portugal. The country’s deficit hit 9.3 percent of GDP in 2009, putting it just a few small steps behind bailout nations Ireland and Greece.

Meanwhile, its overall debt outstanding is closing in on 90 percent of GDP. Standard & Poor’s will likely soon cut its A- rating on Portuguese bonds, while Moody’s Investors Service could lower its rating a couple of levels.

In response, global bond investors are dumping the country’s bonds, driving borrowing costs higher. The government just auctioned off 650 million euros in three-year notes at a yield of 5.4 percent, up from 4.04 percent just last October. Its ten-year borrowing costs? Even higher — recently breaching the 7 percent mark.

Government officials have responded by trotting in front of cameras and microphones to deny they need any help. José Socrates, Portugal’s prime minister, said a few days ago:

“The country is doing its job and doing it well. Portugal will not request financial aid for the simple reason that it’s not necessary.”

Yet, at the same time, EU officials have continued to lay the groundwork for more bailouts. They’re openly talking about boosting the size of the 440 billion euro bailout fund to as large as one TRILLION euros!

Why so much? Because officials know that Portugal would NOT be the last domino to tumble!

Based purely on our analysis of the market’s own signals, the next likely candidates are countries like Belgium and Spain, or even Italy.

Indeed, Spanish bonds now trade at yields that are almost three full percentage points higher than benchmark German bonds, a clear signal that investors view them as much riskier.

European Debt Crisis Has Major Significance For Investors Like You!

Europe's troubles could punish investors worldwide.
Europe’s troubles could punish investors worldwide.

So how does this crisis impact you? What does it signal about OUR future and OUR markets?

First, if you own the debt of troubled European countries — directly or indirectly — you’re caught in a house of pain. One example: The benchmark 10-year note Portugal sold in early 2010 has lost almost 18 percent of its value from its April high.

My advice: Scrub your bond mutual funds and ETFs to make sure they do NOT own this lousy paper. Just look at the most recent quarterly report for details on their holdings.

Example: The iShares S&P/Citigroup International Treasury Bond Fund (IGOV) holds debt issued by Italy, Belgium, Spain, and Portugal, for instance.

Second, the euro itself is getting dragged down by the European debt crisis. So funds loaded down with any euro-denominated bonds — including those issued by Germany, France and others — are affected.

Example: American Century International Bond Fund (AIBRX) is one of the worst-performing international bond funds so far in 2011, losing more than 2.5 percent year-to-date. The culprit? Large holdings of German, Irish, Dutch, and Belgian bonds.

Third, the progression of the European bond crisis is similar to what we’re seeing in the U.S. municipal bond market. Just substitute overburdened, overindebted state names like Illinois, California, or New Jersey for the countries of Greece, Ireland, or Portugal.

If you own municipal debt issued by weaker U.S. states, you’re probably going to lose money as prices fall and yields rise. Get out while there’s still time!

One final note: The sovereign debt crisis has not YET risen to the level of a market-wide, systemic, crash-inducing event. But we have to keep our antennae up. If things spiral out of control, the equity markets could be in for a rough ride.

Fourth, while the debt crises are profit killers in Europe and the U.S., the massive money printing to offset these threats is generating huge profit opportunities elsewhere — in alternative investments like gold, emerging markets, and select currencies.

Until next time,


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