The European Union announced an €85 billion ($113 billion) bailout for Ireland on Sunday. The bailout is a blend of loans, some as long as 10 years, with an average interest rate of 5.8%. The money is projected to cover the Irish government's financing requirements for two years, allowing it to focus on cutting deficits (our guess... the money runs out much sooner).
Two key conditions upset Irish citizens. First, they think the 5.8% interest rate is too high... Even though it's more than 100 basis points cheaper than long-term Johnson & Johnson debt. Who would you rather lend to at those rates? One Irishman told the Associated Press, "We've been screwed by the IMF." Sounds like a welfare recipient complaining how tough it is to get free money. (Absurd video evidence here.)
Second, Ireland has to spend €17.5 billion of its own cash and pension reserves (included in the €85 billion total). The Irish think the big banks that speculated in their country should bear the costs.
Really, none of the details of the Ireland bailout matter. Over the long term, the European Union and the euro are toast. The EU saved Greece (for the time being) in May with a $145 billion bailout. Now, it's Ireland's turn with another $113 billion. We predict Portugal will be next... then Spain.
Last week, Spanish Prime Minister José Luis Rodriguez Zapatero said there's "absolutely" no chance Spain would need a bailout. It's a running joke in the Digest that whenever a government official makes a definitive statement like Sr. Zapatero's, you can bet the opposite is true.
The market has been pricing in an Ireland bailout for over a week. Look at the three-month chart below:
With such a rout leading up to the announcement, you'd think this would be a classic "buy the rumor, sell the news" situation. It's not. The euro initially rallied 0.8% to $1.3355 on news of the bailout. Now, the euro is down more than 1%, approaching $1.30. The market is calling the EU's bluff. It's going to take much more than $250 billion (the combined Greek and Irish bailouts to date) to solve those countries' problems. And we haven't even accounted for Portugal and Spain. The European equity markets are weak... Major European banks Deutsche Bank (German), Banco Santander, and Banco Bilbao (both Spanish) hit new lows today.
And the credit markets agree... The cost of insuring sovereign debt using credit-default swaps jumped. It now costs $602,000 to insure $10 million of Ireland's sovereign debt – up $4,000 since Friday (Irish bonds now yield 9.25%... the highest since the 1999 euro launch). It costs $350,000 a year to insure $10 million of Spanish debt – up $25,000 from Friday. The cost of insuring Portuguese debt jumped $43,000 to $545,000. Italy rose $16,000 to $231,000.
How much money will it take to save Europe? We don't know. But we're certain the continent's problems are far from over (after all, the EU did issue 10-year loans to Ireland)... and it will take hundreds of billions more dollars to plug the leaks.
An interesting article in the Financial Times says the U.S. Department of Agriculture (USDA) is underestimating the amount of corn Russia and China will import in coming years... strong support for Porter and Braden's latest pick in Stansberry's Investment Advisory. The USDA estimates Russia will buy one million tonnes of corn from overseas in 2010-2011. Argentina, which sent an official delegation to Moscow to discuss a supply contract, said the Russia is actually looking for three times that amount – 3 million tonnes. This would be the first time in 30 years Argentina has sold corn to Russia.
China is already importing huge volumes of corn – it purchased 1.3 million tonnes in 2009-10. And the USDA expects another roughly one million tonnes in 2010-11. But top agricultural traders think the expectations are too low... "Believe me, the local market in China is very, very tight," said one senior trader for a top agricultural trading firm. According to the article, as little as 500,000 tonnes of extra supply or demand for corn can swing prices dramatically. If it turns out China is stepping up its purchases like we think, we will see food prices soar.
As we outlined last week, Porter recently attended a secret meeting with some of the world's richest people to discuss the world's food crisis. Everyone agreed... We're going to see higher food prices soon. Porter and Braden dedicated their latest issue of Stansberry's Investment Advisory to this problem... And they recommend a stock that will soar as the food crisis unfolds. You can learn more here...
Another kudos is in order for Matt Badiali. Matt dedicated his August 2010 issue of the S&A Resource Report to uranium. He wrote:
[U]ranium is about to become one of the world's most coveted assets... To meet its growing electricity demand, China plans to build 60 new nuclear reactors within the next 10 years. China's high-growth cousin, India, needs 40 new reactors in the next 20 years. That would increase the number of nuclear power plants in the world by 23%.
This new Asian nuclear boom is expected to be the largest period of nuclear power growth since OPEC's oil embargo. At its peak, back in the 1980s, the nuclear industry started up a new reactor every 15 days. By 2015, we could see a new reactor coming online every five days... The proposed reactors in China alone could consume more than 30% of the uranium mined today. That's why the country signed a 10-year, 10,000-ton deal with giant uranium miner Cameco.
According to the U.S. Energy Information Administration, China's consumption of nuclear electricity will double over the next five years. By 2020, its consumption of nuclear electricity will exceed both Canada and Russia.
Let me repeat... China and India alone will add 23% to the world's existing nuclear reactors in the next 20 years.
Over the next three months, uranium boomed. And the three uranium stocks Matt recommended in his issue soared 75%, 54%, and 48%, respectively. All three companies are trading near 52-week highs. Here's a one-year chart of Cameco (CCJ), Matt's No. 1 uranium pick:
In his latest issue, titled "Resource Income Secrets of the Rich," Matt shows you how to shield 80% of your dividends from taxes. It's an issue you don't want to miss. Sign up for the S&A Resource Report here...
New highs: Denison Mines (DNN), MAG Silver (MVG), Prestige Brands Holdings (PBH), Banco Latinoamericano de Comercio Exterior (BLX).
The booze was flowing this Thanksgiving... judging by the positive feedback in the mailbag. Anything else nice to say? Tell us here... feedback@stansberryresearch.com.
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Regards,
Sean Goldsmith
Baltimore, Maryland
November 29, 2010