Time For The Implosion?
To hear the bears tell it, we should expect the stock market to embark on the long-awaited implosion process. The argument anxiously provided by our furry friends this morning is that all is lost in Europe with yields on Italian debt now over 7%. Now toss in a situation in Greece that just won’t ever go away and Team Merkozy’s talk yesterday of a “new Eurozone” (which presumably kicks out the PIGI’S), and well, the glass-is-at-least-half-empty gang just doesn’t see any way forward.
To be sure there are some disconcerting facts to deal with here. For example, Italy is the world’s third largest debtor nation (care to guess who number one is?). And then there is the fact that the Italian bond market is the biggest in Europe. Next, with yields soaring to the levels that prompted three of the PIGI’s to seek help from the EU/ECB/IMF, it is easy to be unnerved by the action in Italy’s bond market. And finally, we should keep in mind that up until now, Italy has been considered both “too big to fail” and “too big to bail” (bail out, that is).
Traders around the world voted with their feet yesterday as the term “risk off” may be the understatement of the month so far. The major indices got smacked around pretty hard and the action on the charts turned ugly in a hurry. And with important support just below at 1220, the thinking is that the market is one bad headline from returning to that now-familiar trading range.
While I don’t want to be accused of being a perma-bull, I do have one nagging question that I’d like to bring up this morning – so here goes. Is any of the “stuff” that is happening in Italy really a surprise? I mean seriously, did anyone not see this coming?
The key point is this. I will submit that while global leaders can certainly be accused of consistently being behind the curve on the European debt crisis, they, at some point, must have considered the possibility that the contagion would eventually spread to Italy and then perhaps to Spain.
Of course, this is not to say that the powers-that-be in Europe can do much to stop the crisis from spreading. However, I would like to point out that before the EU went all-out on their “comprehensive plan” there was a fair amount of talk about the “coordinated response bazooka” that could be wielded by the world’s central bankers. So, while things may be allowed to get ugly for a while, it might be worth considering that the global leaders could actually do a wee bit more – if they have to.
Is this in and of itself a reason to be outright bullish? Uh, no. However, it also might be a reason to keep from positioning your portfolio for the European implosion that the bears keep going on about. And yes, I could certainly be dead wrong here. But, I AM just saying…
Turning to this morning… Markets have improved a bit on the relatively successful T-Bill auction in Italy.
On the Economic Front… Initial Claims for Unemployment Insurance for the week ending 11/5 fell by 10,000 to 390K. This was below the consensus estimate for 400K and better than last week’s revised total of 400k (from 397K). Continuing Claims for the week ending 10/20 came in at 3.615M vs. 3.690M and last week’s 3.707M.
David Moenning
Editor: The Daily Decision
