While Congress is still battling Obama over the debt ceiling, the European Union agreed on a Greek bailout. European leaders will give Greece 109 billion euros ($156 billion)… And private bondholders will contribute another 50 billion euros via bond exchanges and buybacks. The European rescue fund – the so-called European Financial Stability Facility – will also tap its 440 billion euros to buy bonds across the continent (hoping the action will keep contagion from spreading). The fund can also lend directly to ailing banks to deter speculators.
This Greek bailout stands at a total of $229 billion… We know there will be more. You can only "fix" a market for so long. But for now, the actions worked. The yield on two-year Greek debt, which rose to more than 40% yesterday, fell 1,300 basis points today on the news. Yields on Italian and Spanish 10-year debt fell to 5.25% and 5.62%, respectively (both passed 6% last week).
So why the weak recovery in Italian and Spanish bonds? Because the market knows they're next. The precedent is set. The EFSF will likely exhaust its funds supporting Greece. It will take hundreds of billions of dollars more, possibly into the trillions of dollars, to save the other ailing euro nations. For now, European leaders refuse to increase the size of the bailout fund. They'll bend soon… "The EFSF has gone from being a single-barreled gun to a Gatling gun, but with the same amount of ammo," chief economist at Citigroup Willem Buiter told Bloomberg. "It needs to be increased in size urgently."
The subdued rally in European bonds shows the market's lack of faith in the bailout. Greece is on the road to default. And the problems will spread to other countries. Taking another look at our favorite European indicator, Italian bank UniCredit, tells the story… Shares of UniCredit fell 4.56% today.
In addition, the euro fell 1% to $1.436. And billionaire hedge-fund manager John Paulson thinks it's going lower…
Paulson, whose fund recently lost on financials and Chinese reverse merger Sino Forest, admitted he was "too aggressive" in his positions. Currently, his net long exposure is around 60%, down from 81%. "Eighty-one percent was way too high. We cannot operate the fund at that level," Paulson said on a call to investors. "I'd like to bring the risk down further to about 50%."
In addition to diversifying his financial holdings away from firms with heavy mortgage exposure, Paulson is also shorting the euro… He, like us, expects more destruction from the EU debt crisis.
Meanwhile, gold is soaring… As we expect it to do every time another world government begins "easing." The precious metal is up double digits, hitting a high of $1,608 an ounce today.
If you don't own gold yet, it's not too late. Though we expect a pullback once the U.S. concludes its debt ceiling debate.
On that topic, Congress announced they're not close to a deal yet.
Silver broke $40 an ounce today. And according to Citigroup, it's going much higher (that a major bank is commenting on silver underscores how the metal is now being treated as a mainstream monetary asset)…
"If the final rally in the last bull market repeats, we can expect $100 over the long term," Citi analyst Tom Fitzpatrick wrote. "While the high so far this year was at the same level as the peak in January 1980, we are not convinced that the long-term trend is over yet."
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New 52-week highs (as of 7/21/11): V.F. Corp (VFC), Coca-Cola (KO), W-D 40. (WDFC), CARBO Ceramics (CRR), Eli Lilly (LLY), Comstock Resources (CRK), McDonald's (MCD).
We received great feedback from Dan Ferris' latest issue of The 12% Letter. If you don't already subscribe, you can do so here… And as always, send your feedback to feedback@stansberryresearch.com.
"Thank you for the excellent discussion of the 'Great Debt Ceiling Hoax.'
"You completely debunked all of the hype and lies that we see and hear daily from the Politicians and the lamestream media in the hope that they can scare all of us into giving them more money to throw at their friends and pay back favors.
"While I eagerly await your regular issues and updates for the great stock analyses and recomendations, this issue is my favorite so far this year because it helps me to sift through the nonsense and evaluate my investments from a big picture point of view.
"Please continue your great work and, I for one, look forward to a few more issues similar to this one which explains the big picture." – Paid-up subscriber Capt. Art Sansoucy
Good investing,
Sean Goldsmith
Baltimore, Maryland
July 22, 2011
The Greek bailout arrives… Market still fizzles… UniCredit plunges… Paulson shorting the euro… Metals rally… Caterpillar warns on China slowdown… Great 12% Letter…