Wall Street once again has come down with the European Plague. Today's new disease is Italy as if we needed another. Do we have another Greece here? Not in my eyes. Greece is a country that has a lot of problems and is on the verge of not being able to pay it's debts without the aid of the ECB and others. They suffer from high unemployment, major structural issues, and a public that does not pay their taxes in large part, but complains that higher taxes are intolerable. Italy on the other hand seems to be in pretty good shape fiscally, struggling just like any other country suffering as a result of a slowing economic venue, but their banks are strong, their outlook is positive, they have a good export market, and their government seems poised to implement necessary levels of austerity in order to curb the possibility of further problems. So what happened today and why is Italy on the chopping block? In my view the biggest problem is that the bond vigilantes need someone else to pick on. Greece is no longer in play as the ECB and others have seemingly controlled the Greek problem for the time being. Yes, I am sure we have not heard the last of Greece, but for now they are no longer on the front burner so to speak. Last week there were rumors that Burlesconi in Italy may pull back on some of the austerity measures proposed by the Italian minister of finance. If this is the case that would not be a positive in my mind, but with what has transpired with Italian bonds last Friday and again today, I would suspect that Italy will receive sufficient pressure both internally and from the ECB and other Euro countries to maintain austerity plans and if anything enhance them to insure fiscal security at least on an Italian level. If it is true that Burlesconi wants to lighten up I think this will be quickly resolved. However, the bond shorts see an opportunity based on speculative talk and go to market and short the heck out of Italian paper driving the rates through the roof and causing the CDS spreads to widen making insurance against Italian bonds very expensive. This in turn causes general market speculation that Italy is just like Greece in terms of quality, but being a much larger part of the Euro zone, the sell off is potentially much larger as an Italian default could be catastrophic which I do not argue. I am pretty confident that this will be resolved in the short as the ECB and Euro zone do not need any more problems to deal with today.
So what do we do as investors... My suggestion is to sit tight and let some of this play out. I would not panic sell! If you feel the need to raise cash, only do so in small part and sell some positions where you can take some profits as we can never complain even in hindsight about taking a profit. Also, if you have some losses, as we all do at times, maybe convert some of those losses into cash and make ready that money for redeployment into better investments when markets show a little more clarity. If you are a dividend player, once again just sit tight and keep collecting that insurance money.
Also keep in mind that there are several issues on the table that can cause some uncomfortable market gyrations. We have the Euro situation, the debt ceiling discussions, and the beginning of earnings season having been kicked off by $AA Alcoa today. By the way, the AA earnings were inline and revenues were good. The overall report in my view was a little lackluster, but that is almost par for the course with AA. I will wait and see what other more significant reports have to offer prior to making any earnings season guesses.
Please feel free to make comments. I write what I believe as per my viewpoint. Right, wrong, or somewhere in the middle it is what I feel at the moment of writing. If you agree that is awesome and I am interested to hear your comments. If you disagree I am also interested in your point of view, but I do ask that you keep this blog clean and respectful at all times.
Thanks for reading....
Sincerely,
TraderJive
Follow me on Twitter: @TraderJive
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