Is Italy The Key?

Given the drama that we’ve seen in Greece over the past week (which is yet to be resolved this morning, by the way) and the corresponding market reaction to each and every headline, the bears would have us believe that we should now turn our attention to Italy. In short, if you have enjoyed the way the stock market game has been played recently, then you ought to be in for a treat now that Italy’s Prime Minister Silvio Berlusconi is in the spotlight.

Although markets rallied on the idea that Berlusconi would step down early Monday, rumors of the PM’s resignation were quickly refuted. Of course, the markets tanked on the news. And why not, the source of the report was none other than one of the most reliable journalistic entities available: Facebook. Yep, that’s right folks, with Italian bond yields soaring to new Euro-era highs yesterday and amid numerous calls for his resignation, the PM had time to update his Facebook page.

In addition, there are reports that Mr. Berlusconi is none too happy about the situation in Italy right now. Never mind the fact that the IMF basically put the country on house arrest over the weekend, that yields continue to spike, that the PM is likely to face a confidence vote for his government this week, that the ECB is in the market doing everything it can to quell the panic in Italy’s bond market, or that the EU is already talking about providing emergency measures. No, Mr. Berlusconi is apparently upset because the turmoil in Italy has forced a delay in the release of his latest album. Yep, apparently the Prime Minister is a bit of a crooner in his country.

In all seriousness, the situation in Italy is worthy of concern. The bottom line is that Greece, Ireland, and Portugal all were forced to ask for EU assistance once the yield on their 10-year bonds breached the 6.5% level and stayed there. Apparently yields at this level indicate a complete lack of confidence in the country’s outlook from the bond market’s perspective, which means that buyers are likely to be few and far between going forward. And with Italy needing to roll over between €30 – €40 billion in debt in the near term and approximately €300 billion next year, this could become a problem for the Eurozone – again.

It is also worth noting that according to Reuters, Italy is the world’s third largest debtor nation. So, if bond buyers suddenly decide to take a pass on Italian bond offerings, the bailout game could really start to heat up again. The only problem is that EU leaders have already acknowledged that Italy is too big to bail out as the funds in the EFSF are not nearly adequate to carry Italy for even a year.

So, with the outlook across the pond looking dim, the bears tell us that we should be donning our helmets, selling all rallies, and hunkering down for a long, cold winter. However, with European markets up nicely this morning and the futures in the U.S. currently pointing to a green open, it appears that something strange might be happening to the bear thesis.

Despite yields continuing to rise in Italy (the last quote I saw about an hour ago showed the Italian 10-year over 6.6%), no new PM yet in Greece, and a battle for power shaping up in Italy, stocks are holding up fairly well. So, while this market can and will turn on a dime these days, it would appear that traders and underperforming hedge fund managers may have moved into year-end-rally-mode. To be sure, this is pure speculation on my part. But the fact that stocks have failed to sell off on the Italy news (well, so far at least) can be construed as a positive.

Lest we forget, ’tis the season in which the stock market traditionally rises. And while we may not see a straight up move into the New Years Eve parties, it is worth noting that tradition can be a powerful thing in this business. So, is Italy really the key right now? We’ll see…

Turning to this morning… The markets appear to be ignoring the drama in Greece and Italy for a change with European markets up about +2% on average. Here in the U.S. the futures are pointing to a decent gain at the open.

On the Economic Front… The NFIB Small Business Optimism index rose 0.9 points in October to a reading of 90.2. This was above the consensus for a reading of 89.3 and September’s level of 88.9.

David Moenning
Editor:  The Daily Decision