The European Union Saga

I'm going to give my best efforts here to outline in simple terms this ongoing situation in Europe. 

To start, you may have heard the European Central Bank lowered interest rates on Thursday to make lending easier.  First, this is like using a bandaide on a gunshot wound.  Second, the issue in Europe is too much debt and not enough revenue to support it, so they lowered interest rates to continue enabling money to be lent out to the folks who can't pay it back.  Huh?  This is what's called "buying some time".

There really are no good solutions.  It's a choice between a bad outcome and a horrible outcome.  Greece is a fairly easy example.  They struggle to pay their debts, so they are receiving money to help out.  In return for receiving the money, there are certain requirements. Greece is expected to improve the receipt of taxes owed them (in some instances people and business don't pay their taxes and aren't held fully accountable), many of their citizens won't be able to retire in their mid 50's, and the government will have to sell off some of the assets they own (Greece gov't owns a railroad company with about $250mm in revenues and roughly $1.25 billion in various expenses... Ouch!).  What crazy demands!

I know I'm really simplifying this, but normally a country would just print more money.  This has some other consequences, but it's the luxury of having your own currency.  Oops, that's right, Greece uses the Euro, so they don't have any control over that option.  I'm sure moving to the Euro sounded like such a good idea in the beginning.

At the end of the day this all boils down to decreased spending, whether by consumers, governments, or both.  And when you have decreased spending, there is decreased, if not negative, growth. It is the same outcome for Greece, Italy, Portugal, Spain...  The list goes on and on.  I just can't see how this doesn't have a bigger effect on the earnings projections of companies, yet the forecast in 2012 is for record corporate earnings.  The question to try and answer is how does this affect the US stock markets (and our retirement accounts) if these forecasts prove to be too ambitious. 

I may have to unleash my research department to see where these earnings are projected to come from.  I'll get myself right on it!

In my upcoming posts I want to share with you some more thoughts on the S&P500 (including these record earnings projections) and what I think will be one of the best investment moves of the next several years.

Cheers!
Joel Fink
joel.fink@yahoo.com

Note: There have been some new developments recently (nothing that improves the situation. Just some more promises with no action).  I will comment on these in future posts.