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The European Debt Crisis and Your Investments

A look back on 18 months of analysis and reports on the European Credit Crisis

By Elliott Wave International

In 1999, 11 European countries surrendered their currencies for the euro and a shared monetary authority. Barely a decade later, the once-celebrated EU is in the midst of a credit crisis and its currency is facing collapse.

Elliott Wave International’s analysts have been anticipating and tracking the credit contagion across the European nations for the past two years. EWI subscribers were first alerted to the still-developing European debt crisis back in December 2009.

The following is excerpted from a December 2010 report from The European Debt Crisis, a new report from EWI. This free report provides important analysis from February 2010 through today that helps you understand what the European economic crisis can mean for your investments. Plus, you’ll get a unique perspective on what’s ahead. Find out how to access this free report below.


The Credit Crisis Spreads — December 2010
The credit crisis is escalating as expected. Back in January 2010, when ratings agency Moody’s bestowed “investment grade” status on a widely followed index of sovereign bonds, The European Financial Forecast argued that a renewed Primary-degree decline would in fact aim the credit crisis directly at this critical new realm. Our case for the looming sovereign debt debacle rested primarily on two pieces of evidence: (1) Primary wave 3 (circled) had begun in Europe’s peripheral markets, and (2) premiums for credit-default swaps on European sovereigns (think of an insurance policy against a national default) were already signaling the next phase of the crisis by surpassing their 2008-09 price extremes. The February 2010 issue of EFF published a chart showing rising Greek, Spanish and Italian swaps and offered this description of how Europe’s credit crunch would escalate: “The theme during Primary wave 1 (circled) was default at the individual, corporate and quasi-government level. The theme for Primary wave 3 (circled) will be default at the sovereign level.”

Today, the credit crunch is clearly angling itself away from mere corporations and toward whole countries. On November 15, Bloomberg announced the escalation with this headline:

Companies Safer Than Sovereigns as
Crisis Cracks ‘Old Order’

— Bloomberg, November 15, 2010

London credit strategist Greg Venizelos tells Bloomberg that the “old order” was the one where investors believed large sovereign nations to be better credit risks than corporate borrowers. However, debt is being repriced, he says, and today “corporates are now better credit quality than sovereigns in the periphery.” Indeed, swaps on Italian government bonds are more expensive than 75% of the Italian companies contained in the iTraxx Europe Index of European corporations. In Spain, traders deem Spanish sovereign debt to be riskier than all six Spanish companies in the index. Even in the supposedly safe core European country of France, 5-year swaps tied to French government bonds climbed to an all-time high of 105 basis points in November. At that level, more than half of the 25 French companies in the iTraxx index trade tighter than the French sovereign, according to Bloomberg.

The chart above shows another way to view the escalation of the credit crisis. By plotting the difference, or “spread,” between swaps on European corporations versus those on European sovereigns, the rising line shows derivative traders’ increasing fear over sovereign default relative to corporate borrowers. So, yes, the old order of safer sovereigns is over. But notice, too, that the debt crisis began escalating when the continent’s peripheral markets started topping way back in October 2009. The billion-euro question is, “Who is next?” The media is clearly focusing on Portugal, as 5-year credit default swaps tied to Portuguese bonds are setting all-time records. But charts show that so too are swaps tied to Spanish and Italian bonds. Five-year swaps on Belgian debt also reached an all-time high last month. Either one of these countries could be next. Maybe they’ll all go down together, but in the larger scheme of things, it doesn’t matter. The most important thing to observe is that even core European countries like France and Germany exhibit spiking default insurance premiums, too. These countries are the largest contributors to the �440 billion Facility, the same one that backstops the rest of Europe.

The June 2010 European Financial Forecast said unequivocally that before the storm is over, “at least one, but more likely several, G8 nations will capsize.” We stand by our forecast.


The European Debt Crisis is affecting investments across the globe. Gain a valuable perspective on the European debt crisis and get ahead of what is yet to come in this FREE resource from Elliott Wave International.

Read Your Free Report Now: The European Debt Crisis and Your Investments.

This article was syndicated by Elliott Wave International and was originally published under the headline The European Debt Crisis and Your Investments. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

UK Markets – Should I save or invest?

If you’re looking for the best place to put your money, it’s a difficult question to answer right now. Savings, property and gold have typically been seen as good places to put money and watch it grow, but the desirability of each can seriously vary over time. Here’s a look at saving or investing in the UK markets.

Savings

A great thing about British banks is the FSCS: the Financial Services Compensation Scheme. This is the UK’s ‘statutory fund of last resort’, which basically means it can reimburse people for money lost when financial firms go bankrupt (or are ‘unable, or likely to be unable, to pay claims against them’). This can cover people to the tune of £85,000 per firm.

On the other hand, the base rate / bank rate in the UK is at an all-time low of 0.5%, while inflation is officially 5.2% (as of September 2011). So the value of a pound is actually shrinking more rapidly than usual, but savings accounts aren’t paying much in the way of interest – a quick look on a comparison site shows that the highest-interest instant-access savings account offered around 3.1% at the time of writing.

Property

The good news about property values in the UK is that they’re holding quite steady (compared with many places in the US, for example), although the South (especially London) is doing markedly better than the North.

Looking ahead, however, opinions are divided on what’s due to come next, with some people pointing out how house prices have withstood many of the financial shocks we’ve had in recent years – and others predicting a major dip in house prices (when the base rate goes up, if not before).

Property prices aside, rents are high in much of the UK, which is one reason there are so many ‘amateur’ landlords. According to charity Shelter, rents increased one-and-a-half-times as fast as incomes between 1997 and 2007. The average monthly rent for a two-bedroom property in London is £1,360 – far higher than the £568 average in the rest of the country.

Gold

Gold has traditionally been seen as a ‘safe haven’ in troubled times – something many people will buy when the values of stocks and shares are unpredictable.

According to goldprice.org, the price of gold has just about trebled in five years, rising from $600 an ounce in mid-2006 to over $1,800 in 2011. However, ‘what goes up must come down’, as they say – it’s dropped a fair bit since then, and there’s no sure way of predicting what’s next.

Don’t gamble with…

As always, you shouldn’t gamble with what you can’t afford to lose. Someone with cash to spare who’s looking to make some real profit might feel confident about investing in higher-risk ventures – but someone who needs somewhere safe to put their hard-earned money will want to be a lot more careful.

Further reading:

How to afford an investment property on $5 a day

investment property

Most people believe that it takes a ton of money to buy a quality piece of real estate. They feel that it will cost a whole lot more money than they will ever be able to accumulate from their paychecks alone. While saving for a mortgage is tough if you are trying to accumulate a lump sum of money, it is a whole lot easier if you start by saving small amounts of money. Use these methods to make your dream of owning an investment property affordable.

Save small amounts of money every day

You may not think that saving a couple of dollars a day can help you to buy a property investment but it really can. You could cut out a cup of coffee a day or start eating lunch at home to save yourself five bucks or more a day. You might be surprised to know that an amount as small as $5 a day comes out to $1,825 a year. If you do this for three years then you will have saved almost $5,500 in cash. That is just in principal alone! That is a nice down payment to put down on your investment property.

Invest a small amount of today

The same $5 that you are socking away and saving can grow even higher than that $1,825 a day. If you took that five dollars a day in savings and invested $150 each month then your money would grow at an even faster rate. You could get guaranteed interest with a certificate of deposit or a savings account. You could also take the money and buy some short term government bonds. The amount of money that you have to put down on an investment property will continue to grow. Your mortgage broker will be shocked at the large amount of money that you saved just from some small cutbacks in your budget.

Earn an extra five bucks a day

If you do not want to cut out five dollars a day from your budget then another method you can use is to earn an additional five bucks a day. You can perform a simple task that nets you an extra $35 a week. It is incredibly easy to do this. You could do an extra hour or two of overtime on the job or you could start a little business that just makes $150 a month. It will take you under 10 hours a month to do this and you will have the satisfaction of knowing that all of the money you earned is going to an investment property.

Market Myths Exposed – Learn the Truth Today!

Greetings Investors,

You’ve no doubt heard the old mantras: “stocks for the long haul,” “diversify,” “buy and hold.”

Investment gurus worldwide repeat them daily. But are these strategies really wise for ALL markets? Can advice that sounds so simple (but so vague) be useful to you as an investor?

Anyone who diversified their portfolios across several stocks, bonds and commodities over the past three years knows that diversification is no foolproof way to profit. The same goes for individuals who decided to buy and hold the S&P index 10 years ago — they’re barely at breakeven, even after the recent rally. Many individual stocks have never come back from the drop in 2008-2009.

During the mania — when the trend was almost always up — virtually anything had a good chance to go higher. Investors ignored advice that cautioned against risk, because there was always someone lucking into a moon shot during the insanity. The S&P index itself – followed by the NASDAQ and other markets – sat at the center of the mania. Back then, simply being in an index often outperformed other popular strategies. That’s not the case any more.

Our friends over at Elliott Wave International have just released an ebook to help you recognize and avoid bad investment advice forever. EWI’s 33-page Market Myths Exposed eBook takes the 10 most dangerous investment myths head on and exposes the truth about each one in a way every investor can understand.

You will uncover important myths about the safety of your bank deposits, earnings reports, investing in bubbles, small stocks, inflation and deflation, speculation and more.

Please learn more about the 33-page Market Myths Exposed eBook, and download your copy now..

Regards,

Alan

About the Publisher, Elliott Wave International
Founded in 1979 by Robert R. Prechter Jr., Elliott Wave International (EWI) is the world’s largest market forecasting firm. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private around the world.

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What To Do With Your Pension Plan

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Enjoy your 8 free chapters from Prechter’s Conquer the Crash — the book that foresaw what others have missed.
March 16, 2010

By Editorial Staff

There is no question that Robert Prechter’s Conquer the Crash foresaw and explained nearly every chapter of today’s financial crisis, years before it happened. Enjoy your 8 free chapters from the book with this free Club EWI report; here’s a quick excerpt from chapter 23, “What To Do With Your Pension Plan.” Note especially the last two paragraphs.

Make sure you fully understand all aspects of your government’s individual retirement plans. In the U.S., this includes such structures as IRAs, 401Ks and Keoghs. If you anticipate severe system-wide financial and political stresses, you may decide to liquidate any such plans and pay whatever penalty is required. Why?

Because there are strings attached to the perk of having your money sheltered from taxes. You may do only what the government allows you to do with the money. It restricts certain investments and can change the list at any time. It charges a penalty for early withdrawal and can change the amount of the penalty at any time.

What is the worst that could happen? In Argentina, the government continued to spend more than it took in until it went broke trying to pay the interest on its debt. In December 2001, it seized $2.3 billion dollars worth of deposits in private pension funds to pay its bills.

In the 1930s, the world heard a lot of populist rhetoric about why “rich” people should be plundered for the public good. It is easy to imagine such talk in the next crisis, directed at requiring wealthy people to forfeit their retirement savings for the good of the nation.

With the retirement setup in the U.S., the government need not be as direct as Argentina’s. It need merely assert, after a stock market fall decimates many people’s savings, that stocks are too risky to hold for retirement purposes. Under the guise of protecting you, it could ban stocks and perhaps other investments in tax-exempt pension plans and restrict assets to one category: “safe” long-term U.S. Treasury bonds.

Then it could raise the penalty of early withdrawal to 100 percent. Bingo. The government will have seized the entire $2 trillion — or what’s left of it given a crash — that today is held in government-sponsored, tax-deferred 401K private pension plans. I’m not saying it will happen, but it could, and wouldn’t you rather have your money safely under your own discretion?

Read the rest of Conquer the Crash Chapter 23, “What To Do With Your Pension Plan,” online now, free!  Right now, you can download the 8-chapter Conquer the Crash Collection, free. It includes:Chapter 10: Money, Credit And The Federal Reserve Banking System
Chapter 13: Can The Fed Stop Deflation?
Chapter 23: What To do With Your Pension Plan
Chapter 28: How To Identify A Safe Haven
Chapter 29: Calling In Loans & Paying Off Debt
Chapter 30: What You Should Do If You Run A Business
Chapter 32: Should You Rely On The Government To Protect You?
Chapter 33: Short List of Imperative ‘Do’s’ & ‘Don’ts”

Visit Elliott Wave International to learn more about the free Conquer the Crash Collection.


Elliott Wave International (EWI) is the world’s largest market forecasting firm. EWI’s 20-plus analysts provide around-the-clock forecasts of every major market in the world via the internet and proprietary web systems like Reuters and Bloomberg. EWI’s educational services include conferences, workshops, webinars, video tapes, special reports, books and one of the internet’s richest free content programs, Club EWI.