Here we go. What economists were saying all the time and the markets were successfully ignoring has happened this morning. As I wrote in my previous posts, the Italian bonds raised at 7.4% rate which is not sustainable for Italian economy to pay (Italy’s budget can afford paying a rate around 4.6% only). Italy at this point is a hot candidate for a bailout from EU. That will sink stocks even deeper.
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Late rally today pushed DOW index back above 12,000 points on Euro optimism. In my opinion this optimism doesn’t take into account Italy’s problems with ECB and bonds rate rocketing up. As per the news, the rally started at 2 pm EST on news that Greece will receive the latest installment of emergency aid.
However, it would receive it as long as the country’s two main parties commit to implementing economic reforms agreed to by the country’s previous government. And that still may be an issue. Will the provisional government be strong enough to push those reforms thru? All those reforms will be very painful and people already suffered wage reduction, unemployment benefits reduction and more should be coming.
How will the market react on this issue and how will it react when Italian issues surface more into investors’ attention? Or is market accounted for those problems?
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ECB warned Italy last weekend that it would stop buying its bonds if it won’t pass required reforms of Italian budget to get Italian debt under control, said Yves Mersch a member of a bank governors board. Currently ECB is buying Italian bonds to slow down rates and prevent them from skyrocketing. Although ECB’s interventions the Italian bond rates reached almost 7% today.
ECB ended buyouts of bad bonds of the countries suffering with debt crisis some time ago, however due to worsened debt situation it was forced to start buying bonds back. In last few months ECB has bought bonds for 100 billions Euro. Main portion of bought bonds were Italian. “When we see our interventions sabotaged by the lack of effort of the national governments, then we ask ourselves if those interventions can provide the required improvement” as cited by Italian newspaper La Stampa.
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The Italian bond rates reached all year new highs since Italy joined Eurozone. Today, it raised to 6.67% and that creates a tremendous pressure to Italian budget to pay their loans. ECB intervention couldn’t help this skyrocketing move.
Due to investors’ worries about Italian debt the new rate reached almost 7% and as Reuters says it is unsustainable level for Italian budget. Investors are worried that Italy can become a second victim of the debt crisis in Eurozone.
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Will this new turmoil push the world markets down? We will have to wait for it. A few more days would reveal the next move. If more downside pressure occurs on SPY, that will be a great opportunity to short the market. In that case I will buy some puts on SPY.
Happy Trading!
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There’s an old saying about lousy stocks on Wall Street: “If you liked XYZ at $50, you must love it at $25.” Along those same lines, it could be argued that if you think stocks are cheap now, just wait until you see how cheap they are when earnings estimates come down.
According to Mike Mullaney, portfolio manager at Fiduciary Trust, earnings estimates for next year have to come down another 15% before stocks should be considered cheap.
“It’s not pretty, 925 (on the S&P 500) is kind of the going rate on a worse case scenario among strategists if we do go into a recession period,” Mullaney says in the attached clip. “Most likely there will be blood in the water at that point in time, and most likely that would be a good entry point.”
Mullaney won’t consider the market cheap until he sees 25-30% drop in the S&P pushing it to levels not seen since mid-2009. But he’s not suggesting that stocks are expensive on a historical basis because 12-times estimated earnings is far cheaper than the long term averages.
So are we here yet? It goes in hand with my expectation that the market recovered too fast and too quickly in 2009 – 2010 compared to economy, so now we are in correction of such run. We may go that far down or even lower and it is not a recession as many are trying to say, it is just a correction of too wild recovery not supported by economy, which is still a bit lousy.
Happy Trading
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I had a short discussion with one of my readers via emails whether I would be willing to be issuing a newsletter in which I would be presenting my trades. I am not planning to do that at this point. Maybe later. However, I will try to present some of the trades I am considering to open. Since I am busy during my days I am not sure in what extend I will be able to do it. I will try to show as many trades I am considering as possible.
This time I am looking at Wynn Resorts Ltd (WYNN). The stock had nice upward run during last several months, however recently (at the end of September 2011) it broke thru its long trend line and fell down to 110-ish level.
The stock rebounded and continued back up to its 200 day SMA and its long term trend line. It didn’t have enough strength to continue higher and the cycle repeated. Now we are at the situation when this stock may go back down to re-test 110-ish level.
If I am correct and the stock heads down tomorrow I will buy 1 contract of 130 December Put. To do so I will place a contingency order:
If the last of WYNN is less than or equal to 130.67
Buy to open 1 WYNN Dec 17 2011 130.0 Put at market
If filled I’ll place a stop loss order @ 142.59 where I will sell the put. The stock is high beta stock and currently it moves 5% per day.
Happy Trading!
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It doesn’t even make any sense to comment the news about Greece to vote in referendum about accepting next help from other members of EU. Unfortunately I opened some protective short puts recently which eliminated much of the gains I could make today. But no worries, we will be heading further down.
Happy Trading!
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