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One of the Telltale Signs Behind Risky Stocks

Stock-Markets / Eurozone Debt Crisis Apr 19, 2012 - 09:59 AM GMT

By: Money_Morning

Stock-Markets

Best Financial Markets Analysis ArticleMartin Hutchinson writes: Short-term corporate thinking has been blamed for many of America's economic ills.

With little foresight beyond next year, management sometimes closes down plants and fudges accounting to make this year's earnings look better and boost the stock price.

Often, it is simply because management is excessively rewarded by short-term incentives such as stock options.


While investors might benefit from these shenanigans in the short-run, a new study points out the long-term effects are frequently negative.

A new Harvard Business School study entitled "Short-termism, Investor Clientele and Firm Risk" has shown that short-termism is bad for investors increasing their risks without any corresponding increase in returns.

In other words, risk and the short-term thinking usually go hand in hand.

Breaking Down the Conference Call
The study used a very interesting method to find out which companies are short-term oriented or more risky.

Spending cuts, especially from governments which are overspending, may well stimulate GDP because they free resources for the more productive private sector, whereas tax increases generally worsen recession.

French Elections Hold the Key to the Euro
Whether or not France brings down the euro hinges on the outcome of its upcoming presidential election, set for two rounds April 22 and May 6.

France's current position is very confused, to say the least. No fewer than five candidates have a chance to make it into the two-candidate runoff.

The incumbent, Nicolas Sarkozy, is currently running slightly behind the mainstream socialist Francois Hollande, but three other candidates potentially could knock one or the other of the front-runners out of the second round.

They are Marine LePen, a nationalist; Francois Bayrou, a moderate; and Jean-Luc Melanchon, an extreme leftist.

Presumably if any of those three made it to the second round, they would be beaten by the remaining major party candidate, as was LePen's father by Jacques Chirac in 2002.

But it has to be said that electoral prognostication is exceptionally difficult.

If Sarkozy or Bayrou win, nothing much changes; France remains committed to the current consensus Eurozone policies and the Eurozone probably "muddles through."

But if one of the other three wins, there is going to be a big problem for the European Union (EU).

LePen would be anathema to the EU leadership, so even if she committed to continue austere fiscal policies, the markets would probably react badly.

As for a Hollande or Melanchon victory, the commitment to government austerity is just not there. In the current nervous state of the markets, France's budget deficit could become impossible to finance.

Hollande, for example, wants to reverse Sarkozy's earlier raising of France's pension age, while also pushing the top income tax rate to 75%.

An election win by Hollande or (very unlikely) Melanchon would simultaneously weaken the credibility of France's own austerity program and weaken the Eurozone coalition that has imposed austerity on Greece, Portugal, Ireland, Italy and Spain.

That would almost certainly cause markets to attack French government bonds, as well as stepping up the attack on Spanish, and probably Italian, government bonds.

The reality is that a France managed by an anti-austerity leftist, even a moderate one, is simply too far from Germany and Scandinavia in its fiscal management and economic outlook to remain part of the same currency zone.

And even if Germany and Scandinavia wanted France to remain part of the euro, they don't have the resources to bail France out.

Hence a Hollande victory at France's election May 6--currently believed to be at least a 50-50 probability--would almost certainly mean the end of the struggle to hold the euro together, and its collapse in failure.

Questions About France, Italy, Spain and the Euro
France, Italy and Spain - unlike Greece - do have ample resources with which to support their government bond markets, provided they control their own currencies.

Since most of their obligations are denominated in euros, their debt/GDP ratios would rise, but probably only by 15-20% since a devaluation of that level would be sufficient to make them export powerhouses.

Thus in principle a break-up of the euro need not lead to a world banking collapse, since the value of French, Spanish and Italian government debt would remain solid.

However, all three countries would have questions about their future.

In France's case, the commitment of the new government to controlling public spending would be questionable.

In Spain, the current government's position would be weakened. What's more, there would be a further round of banking trouble, as home mortgages denominated in euros would be secured only against houses valued in new pesetas.

In Italy, the Monti government, imposed by the EU, would doubtless fall, bringing political uncertainty and further aggression by the country's powerful unions.

And even if everything turned out to be okay in the end (except in Greece) the uncertainty would roil world markets, including in the United States.

For investors, that means it may pay to keep our heads down until the French election results are known.

While everybody is watching Spain, it is France that could topple.

Source :http://moneymorning.com/2012/04/19/one-of-the-telltale-signs-behind-risky-stocks/

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