Trader Talk

Where’s the French?

The French Caribbean in February: "Where are the French?"


If you want to see how much the European crisis has touched everyone — but particularly the more well-heeled — take a quick trip to St. Martin and St. Barts.

I just did, and when I asked hotel owners, cab drivers, and head waiters the usual, "How's business?" question, the near-universal answer was, "Comme ci, comme ça" (or so-so).

Specifically: There are a lot fewer Europeans. Yes, there are Americans and Canadians, and —over the holidays — a boatload of newly enriched Brazilians, on top of the smattering of Russians.

But the French, the Italians, the Germans — they are much less in evidence than previous years. One restaurant owner in Gustavia, the charming capital of St. Barts, said business since the start of the year was 30 percent below the same period last year, and that all the other restaurant owners were down, as well.


1) Greece is not nearly over. In the next week, here is what has to happen:

a) the completion of the Greek private sector bond exchange;

b) Greece needs to pass further legislation to implement the terms of the bailout;

c) the European Central Bank will hold its second three-year lending facility Feb. 29;

d) a Eurogroup finance meeting next week; and

e) a summit of European leaders March 1.

That is a big agenda.

Another problem: The restructuring of "official sector" debt. The ECB already said they will pass on profits from the government debt they own, but there is another official sector that has said nothing. Remember, in 2010 many euro countries lent bilaterally to Greece: The first bailout of $110 billion. You will likely see haircuts on those loans, as well.

2) The big question yesterday and today among traders: "What happens when the Greek program fails?"

Yes, there will be more "troika" officials on the ground in Athens, but traders note that the missing ingredient is still, well, missing: A class of people that have a vested interest in real reform.

There is no vested interest in shrinking the state. There is no vested interest in cutting pensions of civil servants. There is no vested interest in reforming the services industry. There is no vested interest in opening up professions, liberalizing hiring and firing rules, and reducing the ability of government officials to make money on the side.

The good news: Kick the can has increased the chances that the European Unions can enforce the firewalls they are slowly creating. The ECB's long-term refinancing operation (LTRO) has eliminated much fat tail risk — you don't hear talk the euro will not survive anymore, do you?

The elements of a firewall are in place, but is it big enough?

Look what we have:

a) a more flexible ECB that next week will unleash a second three-year lending facility (LTRO) that may top 1 trillion euros ($1.3 trillion);

b) a European bailout program — the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) — that may soon be running in parallel. The money is substantial but still may not be big enough: the EFSF has roughly 250 billion euros ($331 billion) in it (not including the money already committed to Greece, Ireland, and Portugal), the ESM is expected to be at least 500 billion euros ($661 billion), to be decided in March.

Is this enough? The answer among the trading community is, it's a big help, but it's still kick the can. What is enough? What you ultimately need is: 1) the ECB to commit to be the lender of last resort; and 2) a Eurobond.

3) A broader question being debated is: So what if the so-called troika takes over Greece? Will that matter. One euro analyst noted to me this morning that the academic literature indicates that more centralization of fiscal policy, more oversight does not necessarily mean a better outcome. In other words, more power to Brussels doesn't mean a better outcome.

4) Shares slide on mixed earnings, forecasts:

Toll Brothers drops 3.4 percent pre-open after the luxury home builder reported a first-quarter loss and missed analysts' top-line and bottom-line expectations due to lower home deliveries and more contract cancellations. The company posted a first-quarter loss of 2 cents a share, versus the Street's 2 cents a share profit estimate. Home deliveries decreased 1 percent to 564 units, while the company's contract cancellation rate rose to 6.2 percent compared to 5.7 percent a year earlier. Toll Brothers said the "market feels healthier that it did one year ago" and estimates it will deliver between 2,600 and 3,200 homes in 2012 at an average price of $550,000 to $575,000 per home. The company's forecast follows reports from Masco and Owens Corning — two building materials companies that see optimism built into the spring home buying season.

Dollar Tree tumbles 2.3 percent pre-market after the discounter retailer said forecasts may fall short. Dollar Tree expects 2012 first-quarter earnings per share to be in the range of $0.91 to $0.97, compared to analysts' expectation of $0.97. The company beat the Street's fourth-quarter estimates, with slightly better-than-expected revenue. Same-store sales rose 7.3 percent as low-priced goods continued to lure consumers, and operating margin increased to 15.5 percent.

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