Mish's Global Economic Trend Analysis

---

• Holiday Price Wars Begin Because "Price Matters"
• Greece Pension Plans Insolvent; No Conceivable Way to Make Promises; Can Spain and Portugal be Far Behind?
• Lines to Withdraw Deposits Queue Up as Run on the Banks starts in Greece
• Apply Enough Pressure, Something Eventually Breaks; Italy Government on Brink of Collapse

Holiday Price Wars Begin Because "Price Matters" Posted: 25 Oct 2011 10:03 PM PDT In yet another indication of a weak holiday shopping season, stores aim to outdo each other as shoppers focus on getting the best deals. This shopping season is shaping up into two key words "Price Matters" A week before Halloween and two full months before Christmas, stores are desperately trying to outdo each other in hopes of drawing in customers worn down by the economy. Wal-Mart, the biggest store in the nation, joined the price wars Monday by announcing that it would give gift cards to shoppers if they buy something there and find it somewhere else cheaper. Staples and Bed Bath & Beyond have already said they will match the lowest prices of Amazon.com and other big Internet retailers. Sears is going a step further, offering to beat a competitor's best price by 10 percent. In a recent poll of 1,000 shoppers by America's Research Group, 78 percent said they were more driven by sales than they were a year ago. During the financial meltdown in 2008, that figure was only 68 percent. Duncan MacNaughton, chief merchandising officer for Wal-Mart's U.S. stores, told reporters Monday that he has noticed "much more promotional intensity and gimmicks" among competitors. The holiday price wars mark an acceleration of a trend that has already swept the retail industry. Lowe's, the nation's No. 2 home improvement store, said in August it was starting to focus on everyday low prices for items that customers can easily comparison-shop at rivals like Home Depot and Sears. 64 percent of shoppers polled said that it would take discounts between 30 percent to 50 percent to get them to spend, up from 54 percent last year, according to a recent Citi Investment Research & Analysis survey of a little more than 1,000 customers. Customers looking for 60 percent off as a big motivator to spend increased to 10 percent from 8 percent last year, the survey showed. "The reality is consumers are targeted. They're well informed, and they've searched the Internet for price information," said Bill Martin, co-founder of ShopperTrak, which expects foot traffic to drop 2.2 percent during the holiday season compared with a year ago. It is extremely rare to see shopping estimates lower than last year. That does not mean lower traffic and lower sales are written in stone, but that is the way consumer sentiment numbers and shipping stats are shaping up. For details, please see ... Unprecedented Drop in Port Traffic: A Sobering Omen for Holiday Sales or Should we Listen to Analysts? More Alarming Shipping News and Charts: Railfax Railroad, Ceridian Trucking, Harper-Petersen Shipping; Reader Anecdotes Even if spending does not drop, expect profits to drop on reduced markups and increased discounts. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Greece Pension Plans Insolvent; No Conceivable Way to Make Promises; Can Spain and Portugal be Far Behind? Posted: 25 Oct 2011 12:51 PM PDT I am attempting to figure out just how deep in the hole Greek pension plans are. I have not had any luck finding plans or asset holdings but there are a few things we know and some assumptions we can make. One of the things we do know is that Greek pension plans are one of the largest holders of Greek bonds. For the sake of argument, let's assume a 60% haircut on the value of those bonds although I believe that haircut will increase over time. The critical question is what percentage the pension plans hold Greek bonds, other sovereign bonds, Greek equities, and other equities. Here is a look at the stock markets of Greece, Germany, and France from the site Trading Economics. Click on any chart for sharper image. Greece Stock Market German Stock Market French Stock Market Here are a few scenarios assuming the Greek pension plans are primarily weighted in Greek bonds. These scenarios may or may not be realistic. 60% Greek Bonds and 40% Greek Equities Down 60% on 60% and down 85% on 40%. Current value is 40% of 60% + 15% of 40% Current value is 24% + 6% = 30% Plan value is down 70% since 2008 60% Greek Bonds and 40% European Equities (weighted 50% Greece, 25% Germany, 25% France) Down 60% on 60%, Down 85% on 20%, Down 41% on 10%, Down 25% on 10% Current value is 40% of 60% + 15% of 25% + 59% of 10% + 75% of 10% Current value is 24% + 3.75% + 5.9% + 7.5% = 41.15% Plan value is down 58.85% since 2008 There are more than one Greek pension plan programs, but no matter what they are invested in, all of them have horrendous losses in the last few years. Moreover, the more the plans are invested in the Greek equities markets and Greek bonds vs. other European bonds and other European equities, the worse off those pension plans are. If the plans are primarily in German and French bonds as opposed to Greek bonds, the plans are in much better shape than presented in the above examples. If the plans are primarily in Greek equities they are far worse. To know just how badly underfunded the plans are, we need to look at individual plans, as well as pension plan assumptions. Greek citizens need to be told the truth regarding those pension plans, no matter how bad the situation is. Because of the holdings of Greek bonds, one thing I am sure of is the already crippled finances of Greek citizens are about to take another hit. I do not believe there is any conceivable way the promises will be kept even with agreed upon pension cutbacks. The answer to headline question "Can Spain and Portugal be Far Behind?" is no. It will become apparent as soon as there are haircuts on Spanish and Portuguese bonds (assuming it is not apparent already). Addendum: Please consider Funds, banks exposed to any Greek restructuring Greek banks are estimated to hold close to 20 percent of the country's estimated 327 billion euro sovereign debt, or nearly 60 billion euros. National Bank has the biggest share at 12.8 billion euros; the second biggest bank, EFG Eurobank, has about 7.4 billion euros, according to sources at the banks. Greek social security funds hold slightly over 8 billion euros, according to the Finance Ministry. But their relative exposure is huge, as their liquid assets total 11.68 billion euros. IKA, the biggest fund, has almost two thirds of its liquid assets in Greek bonds and Treasury bills. If they are unable to pay health and pension benefits, the state will be forced to help, which would further hurt its fiscal position as the government defies public opposition to impose waves of tough austerity measures. Some analysts therefore think the Greek politicians who are urging debt rescheduling may not fully understand what it would entail. Two-thirds in Greek bonds and US Treasuries, OK - Split how? Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Lines to Withdraw Deposits Queue Up as Run on the Banks starts in Greece Posted: 25 Oct 2011 10:29 AM PDT With talk of 50% or 60% haircuts on Greek bonds, already mistrustful Greek citizens have queued up to pull deposits. Via Google Translate, The Bild reports Greeks Plunder their Accounts in Fear of Debt Cuts. Monday morning, 7.40 clock in the district of Athens, "Agia Paraskevi". We, the BILD reporters are witnesses, of a queue in front of a branch of the "National Bank of Greece" right after the opening at 8:00. "I come here to immediately pick up my pension € 300. Who knows what else happened today. My money is safe only when it is at home" said Pensioners Evagelos Dimitros age 73. The head of an Athens bank branch told BILD: "More and more Greeks who still have some money come to get it from the bank. In my office there are a total of 5,000 customers, 2,500 of which either have their money transferred abroad or hoard it at home. If this continues, there will soon be no more money." Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Apply Enough Pressure, Something Eventually Breaks; Italy Government on Brink of Collapse Posted: 25 Oct 2011 09:20 AM PDT The EU has applied constant pressure on Italian prime minister Silvio Berlusconi for more austerity measures, more reforms, and more loss of sovereignty. This prompted a humiliated Berlusconi who has enough problems of his own to launch a verbal attack on EU officials stating "No one in the EU can nominate themselves as special administrators and speak in the name of elected governments and the European people. No one is in the position of giving lessons to his partners". Today it should not be surprising to see the Financial Times report Italian government on brink of collapse Silvio Berlusconi's centre-right coalition government in Italy appears in danger of collapsing over European Union demands for a demonstration of concrete action on economic reform by Wednesday's summit of eurozone leaders. The EU ultimatum delivered to Mr Berlusconi in Brussels on Sunday risks breaking his coalition instead of giving it an external impetus to move ahead on measures to cut Italy's debt and promote economic growth. The ultimatum was delivered as part of efforts to resolve the eurozone sovereign debt crisis, but the Italians' failure to reach agreement on reform threatens EU leaders' stated goal of finalising at Wednesday's summit a comprehensive solution to the crisis. Talks on Tuesday morning between Mr Berlusconi and his Northern League coalition partners failed to resolve the deadlock – centred on proposed pension reforms – after negotiations into Monday night made little progress. The prime minister's People of Liberty party has proposed that the pension age be raised to 67 years from 65 in line with increasing life expectancy, and that the system of length-of-service pensions also be modified. The Northern League is opposed and La Padania, its party newspaper, on Tuesday attacked what it called "euro-tyranny". Berlusconi Government Already Collapsed If you apply enough pressure long enough something will break. It already has. Berlusconi's coalition has failed, even though Berlusconi has survived several "votes of confidence". The opposition and members of the coalition are simply waiting for the opportune time to dump him. Giorgio Napolitano, Italy's head of state, a figurative position, warned Berlusconi to adopt the "new decisions of great importance" that he had promised. The Financial Times comments "Mr Napolitano, strongly pro-European and one of the few remaining Italian politicians to command widespread public respect, dismissed complaints of loss of sovereignty as irrelevant, noting that Italy had accepted limits to its sovereignty when it became a founding member of the European Union and later in joining its single currency." Insufficient Votes How do you adopt "new decisions of great importance" when the votes are not there? Italy desperately needs pension reforms and an increase in retirement age. However, the time to work out such problems was when the Eurozone first formed. Now these structural reforms, forced austerity measures, and most importantly need to obtain common fiscal agreements come at a time of of political strife and a recession. Together with massive problems in Spain and Portugal, an unworkable EFSF (whether leverage is used or not), and recent decisions by the German Supreme Court, it is only a matter of time before the Maastricht Treaty itself collapses as unworkable. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

You are subscribed to email updates from Mish's Global Economic Trend Analysis To stop receiving these emails, you may unsubscribe now.	Email delivery powered by Google
Google Inc., 20 West Kinzie, Chicago IL USA 60610