Cyprus Resolution In Sight; Europe Economic Contraction

Cyprus Resolution In Sight

Before I get into the Cyrus issue, I wanted to talk a little about three speculative stocks/companies that I have referenced in previous notes: Acadia Pharmaceuticals (ACAD); Sarepta Therapeutics (SRPT), and Trius Pharmaceuticals (TSRX). Again, as I said in earlier notes, I am not recommending these; but, I have put my money “where my mouth is,” — so to speak, as I own/bought all three of them — representing a combined value of about 10% of my portfolio. My cost basis is in the 5% range — the rest is gains so far. ACAD is having a stellar day today, up 24% today from the $6.60 range yesterday (Wed, Mar. 20th) to $8.24 today. The company is in Phase III testing of a Parkinson’s disease drug — and, apparently they knocked it out of the park during recently concluded experimental trials. I am most happy for those whom are suffering from this insidious disease and I hope for their sake that this drug works as well as it appears. From a stock standpoint, I believe the “fun” is just starting and I intend to buy more tomorrow. Please do your own due diligence. There is nothing guaranteed. If you decide to get a position, be sure you have the risk tolerance — biotechs can be especially volatile.

The market today is retreating a bit on a hodgepodge of disappointing news. Cyprus remains in crisis mode and the EU has told that country that they have until Monday close of business to reach a settlement or, the planes that have been flying in Euros will cease. Essentially at that point, Cyprus will be in default and bankrupt. Individual Cypriot’s and others have been able to get Euros at ATMs (limited withdrawals) since Monday; but, businesses have not — and banks are to remain closed till Tuesday. Word this evening is that we’re very close to a “solution.” At least one of two of the worst undercapitalized banks in Cyprus will be shuttered (the EU prefers both banks be shuttered). Those with 100K Euros or less will not lose their money nor will they have a levy imposed — at least at this time. Those accounts in excess of 100K Euros might be able to keep as much as 50% of that total above 100K; but, they would suffer about a 15% levy on that money. The rest of their money will be “confiscated” and converted into shares (to be redeemed in 5yr – 10yrs) in the new bank that emerges — and, they will become the new owners/shareholders.

I believe this is a watershed event, a “Lehman Moment,” for Cyprus and Europe. This crisis has exposed the flaws and shortcomings of a dysfunctional “integrated” (not) monetary union. An EU exit was designed to be odious, painful, and so uncomfortable that it would be unlikely to happen. Cyprus could still leave at his point; but is diminishing as we move into the evening. And, once one country leaves…….Cyprus represents a systemic risk for Europe and the EURO. As Benjamin Franklin said as the British put a price on his head and the other Sons of Liberty, “We Must All Hang Together Or, We Most Assuredly Will Hang Separately.” If this event spirals downward into next week, we will very likely see that long predicted correction in the U.S. stock market. We could get a much more serious correction here than most appreciate if this situation worsens. And, we could witness the ugly chaos of a run on banks in Cyprus — the likes of which haven’t been seen since The Great Depression. Gold will also get a bid and, may continue to move higher even if we get a resolution to Cyprus. If we get a settlement tonight and/or before Monday, the U.S. stock market — along with Japan — remains the best place in a bad neighborhood.

European Economic Contraction Worsens

Manufacturing and services numbers out of Germany and France for March were terrible. As the old saying goes, “You Can Put Lipstick On A Pig But, At The End Of The Day It’s Still A Pig.” Germany and France account for 50% of the entire GDP of the EU. French manufacturing PMI was a paltry 41.1 in March vs. forecasts of 43.1, while French services PMI was 46.5 vs. forecasts of 48.3. Germany’s manufacturing PMI was 48.9 — anything below 50% signifies economic contraction. EU manufacturing PMI came in at 46.6 vs. the forecast of 47.9. Overall, Europe’s economie’s are shrinking at a faster rate as we move deeper into 2013. Meanwhile in the UK, PM David Cameron reduced Britain’s GDP forecast for 2013 by half — down to 0.6%. He added that it is unlikely that Britain would meet its debt reduction goals this year. Labor Party leader Ed Balls called the UK economy “colossally off-track,” and that Britain was “borrowing for failure.” He called on PM Cameron to do an immediate “U-turn.” Finally, Italy’s Beppe Grillo asked to be allowed to form a government and said he wants a referendum on Italy’s EU membership. For Europe, “these are the times that try men’s souls.”

The U.S. and China continue to show economic growth; but, one does wonder how much longer this decoupling can continue? And, which will prevail? Will the U.S. and China help save Europe this year; or, will their economic woes start to negatively impact the U.S? I sure hope not — the Fed is out of bullets and we’re $17T in debt. What do you think? I am still bullish on U.S. equities — all things being equal. If we get a resolution to Cyprus tomorrow, today’s pullback will have represented a buying opportunity. Off to the Virginia Private Investigator’s Association monthly meeting tonight. V/R, R.C. Porter.

3 comments

  1. Ira Haron · · Reply

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