[dropcap]F[/dropcap]acebook’s massive IPO captured the nation’s interest, but developments in Europe dominated financial markets. Greece called for new elections in June, but the rest of the EU seems to be moving rapidly toward the idea of pushing the debt riddled country out of the Euro. Rumors of capital withdrawals from Greek banks fueled fear. Spanish banks also came under scrutiny. Stocks fell every day. Treasuries, the Dollar, and German bunds rallied. Gold was up modestly.
S&P 500: 1,295 (-4.3%)
MSCI EAFE: (-5.9%)
US 10-Year Treasury Yield: 1.71% (-0.13%)
Gold: $1,591 (+0.6%)
USD/EUR: $1.277 (-1.2%)
- Monday – Yahoo announced CEO Scott Thompson resigned in the wake of controversy over his academic records.
- Tuesday – Stories surfaced that Greek depositors withdrew $900 million from banks. It was unclear what timeframe was considered.
- Tuesday – Francois Hollande was sworn in as France’s president .
- Wednesday – April housing starts and industrial production in the U.S. increased more than expected.
- Thursday – The U.S. Commerce Department found several Chinese solar panel companies guilty of dumping and issued a 31% tariff on their products.
- Thursday – Hewlett Packard announced it will lay off 25,000 to 30,000 employees.
- Thursday – The head of leftist Greek party Syriza threatened to withhold payments to creditors if the E.U. cuts off additional funding. The move potentially pushed other European leaders closer to the idea of Greece exiting the Euro.
- Thursday – Spanish bank Bankia shares plunged after a newspaper reported that the bank suffered a billion euros of withdrawals in the prior week. The story was not confirmed.
- Friday – Facebook raises a record $16 billion in its IPO.
- Friday – Spain’s central bank announces the level of bad loans on the books is at an 18 year high.
First, congratulations to Facebook and its shareholders. The underwriters also deserve a nod. The stock closed its first day of trading almost exactly at its IPO price. Huge gains on the first day of trading may make investors happy, but they shortchange the company of valuable capital.
In Europe, Greece was unable to form a government and appears to be spiraling toward disaster. Agitating comments by Alexis Tsipras, the 37 year old head of the Coalition of the Radical Left (and potentially the next prime minister), pushed some European leaders to talk more openly about an exit.
In our view, the ECB (with Germany’s consent) should be prepared to immediately and strongly guarantee Euro denominated bank deposits in all European Monetary Union countries except for Greece. This is the only way to stop the rot from spreading. The EFSF may play a similar role, but it lacks the (potential) unlimited firepower of the ECB. Europe and the world can handle a Greek exit, but massive bank failure in Portugal, Spain or elsewhere would be much more serious. The ECB will also have to step up purchases of Spanish bonds. The ECB does not currently have the authority to guarantee banks carte blanche, but there are several loopholes which could be utilized given what is at stake.
Several countries in Europe are in bad shape, but Greece is the only one past the point of no return. Greece is in this situation because of years of low productivity, excessive spending, waste, corruption, and fraudulent accounting. Now it is time to pay the price.
Currently, everyone is laser focused on whether Greece should remain in the Euro. This is preventing almost anything else from being accomplished. Even if it wants to, Greece won’t have an answer until the new elections in mid-June. That may be longer than the world is willing to wait.
Europe has overcome far greater challenges, and it will eventually overcome this one. Meanwhile, the stock market will continue to suffer until a credible stabilization plan is put in place. Once it is, which could be soon, fear should subside and capital markets would recover.