Euro-Crash or Euro-Trash? Along With A Compelling Case for Transocean Bonds

I must admit I may have spoken a bit too early in my mea culpa to European Central Bank head Jean Claude Trichet. Now I may be wrong but it appears that orchestrating the E.U, I.M F bailout fund absolutely wore him out and he needed another extended nap. Make no mistake about two things. 1. The Eurodollar and the European Union is under siege. 2. US markets are being held hostage by the Euro dollar. Where is the leadership? At a time when liquidity is becoming tight, the European Central Bank is accumulating Euro’s. Have they learned nothing? Say it with me, Quantitative Easing! President Obama, our Irish President was searching for a bit of arse to kick a few short days ago, here’s one with a bulls-eye, and in need of it. Wake Up! The ECB must take a page from the Bernanke Fed playbook and expand the balance sheet. Purchase assets and pump Euro’s into the system. Take a look at Spain’s financial behemoth, Banco Santander-STD. Their business is churning along. Their expansion plans being executed, most recently with the $2.5 billion purchase of Bank of America’s, Santander Mexico stake. Yet, the stock is getting taken to the woodshed daily. Why? Fears of liquidity or rather illiquidity. Santander generates tons of free cash flow and is very well capitalized. However, if Trichet continues to stay the course in building his Euro stash, perception may become reality and tip the first domino. Highly unlikely. Even he must be aware of the pressure from vocal EU member Germany to follow the Bernanke playbook.

I’ve noted in the past a Eurodollar target range of $1.12-$1.15. Yesterday’s action was impacted negatively by two things. Goldman Sach’s revised their EU target to $1.15. Separately, traders, talking up their positions are whispering about a potential (not likely) prepackaged bankruptcy for British Petroleum-BP. BP generates $300 billion in annual revenues along with roughly $20 billion in earnings and has a global footprint vs. as yet an unknown liability in cleanup and compensation. Any settlements would likely take years to agree upon in our court system. Which in the mean time, BP can begin to reserve against potential claims. However, it is an election year so, what the heck give a politician a soap box. Midday a story floated out that 30 lawmakers sent a letter to BP head Haywood suggesting he suspend the dividend. When did the legislative body begin to have a say in whether a publicly traded company “may” be permitted to pay their investors and shareholders (which may include state pension funds) a dividend. Oops! One caveat may be legislators may be allowed if the US government owns shares of said bailed out company. Otherwise, butt out! This impromptu proclamation,” you’ll pay not a dime before it’s time” flung open the gates for selling anything oil related and helped wipe out the days gains.

We are most likely trading within a well defined trading range. Probing both support and resistance for investor resolve. The Euro must find its equilibrium. We’ve tossed the child into the deep end of the pool to teach him how to swim. Coaches Merkel (German Chancellor) and Berlusconi (Italian Prime Minister) are bellowing instructions. Good thing. The life guard (Trichet) is at the other end of the pool checking bikinis. Lastly, Chairman Bernanke reiterated what I’ve been seeing in the overall recovery. Namely, things continue to improve. The velocity of money movement is increasing, inflation is benign, interest rates will rise,,,, at some point and job creation is uneven but improving. The message? Domestically we are in much better shape due to many of the aggressive earlier steps taken. The probability of a double dip recession is limited. So, let’s just keep our eye on the bouncing Euro. Euro-Cash to Euro-trash in this environment is a rather short hop.

While BP has been the headline grabber Transocean's-RIG, stock and bonds have also come under intense selling pressure. This may be presenting a buying opportunity RIG's bonds due out in 2018 were yielding 8 7/8% as of this morning. Litigation risks and cleanup costs remain surely. However, Trans is a well diversified company, generates $11 billion in annual revenue, $2.8 billion in annual earnings, $1.5 billion in cash on hand and a manageable outstanding debt level.

In a note of full disclosure I may own or look to purchase in the future Transocean bonds or equity. Before making any investment decision, please do your own due diligence and contact your investment professional.