Here is the chart for today's trading action in the Dow (look at the 1 day chart)
We started off down on fears of rising yields on European sovereign debt bonds. Rising oil prices ($102/brl WTI crude +2.27% today) also sent the markets down. Then the markets clawed their way back to even at mid afternoon on hopes that the ECB would step in wherever necessary to prop up the debt markets. Here is a quote from the WSJ,
"At the same time, the European Central Bank bought Italian, Spanish and Portuguese government bonds, bringing yields down and lending support to European shares. Even so, the yield on the Italian 10-year government bond remained stubbornly high, trading above 7%—a level near which other European countries have had to seek bailouts—before finishing at 6.992%."
But what fueled the late day sell off was a note from Fitch rating agency citing a possible downgrade of U.S. bank credit ratings on U.S. bank exposure to European markets.
Here's the Fitch release:
U.S. banks have manageable direct exposures to the stressed European markets (Greece, Ireland, Italy, Portugal and Spain), but further contagion poses a serious risk, according to a Fitch Ratings report.
Fitch believes that unless the Eurozone debt crisis is resolved in a timely and orderly manner, the broad credit outlook for the U.S. banking industry could worsen. Fitch’s current outlook for the industry is stable, reflecting improved fundamentals at most banks combined with ratings lower than at pre-crisis levels. However, risks of a negative shock are rising and could alter this outlook.
U.S. banks have reduced direct exposure to stressed European markets considerably over the past year in Fitch’s view. Direct exposures appear manageable in the context of banks’ capital positions and diverse earnings streams. Public disclosure of direct exposures has generally improved recently but varies from bank to bank.
The full report ‘U.S. Banks – European Exposure’ is available on the Fitch web site ‘www.fitchratings.com’. Specific country exposures for the large U.S. banks are provided in the report.
So there you have the action of today in a nut shell. Since this blog would be pointless without some opinion on the matter, (especially since I'm only currently able to blog once in a while) here we go.
Basically it's the same old story, except the story continues to get worse. The only good piece of news I heard today is that the U.S. banks have slowly "reduced direct exposure to stressed European markets considerably over the past year." That is taken directly from the Fitch release above. Without knowing how much or how little these banks are exposed to European markets it's hard to say what scale of an effect a European collapse/recession/bank failure/bank run would have on the U.S. markets. I think if anyone knew they would be very carefully calculating their bets to make a killing once all the facts are clear. Earlier, even a month ago, I thought that the European issue could be solved. I thought that they could put together a "comprehensive plan" that would be able to stabilize the European sovereign debt issues enough to allow us to enter into a nice little bull market. It appears that reality is drifting farther and farther away. As mentioned in a prior blog, I'm not an economist with a Ph.d, nor do I strive to be. I just enjoy utilizing my common sense and whatever knowledge I have of the stock market, and from those things deduce an opinion on the matter. My opinion is this: The European situation will end badly, it is a now a matter of when. Do I put my bets in now, or wait for a little rally? Timing is everything. However, to err on the side of caution, if I am going to place any bets, I think I would do it sooner than later. I would probably buy some selection of the following stocks: Gold, the VIX, SDS, SKF, TVIX, FAZ, TZA. These are all short ETFs basically, except Gold and the VIX, which is just an index. Most are also 2 or 3x leveraged.
Of course this is not an advisable portfolio. If the market turned around and started to go higher, you would certainly lose a lot of money. However, I would rather buy short ETFs than short individual stocks because if I short a stock and it goes up, I can lose an indefinite amount of money as it continues to climb. Whereas if I own an ETF I can only lose whatever money I put into it. Comment if you're not clear what I mean by that. Sure, the investments I listed above are not advisable, especially if not part of a diversified portfolio, but are owning stocks right now really that advisable?
Cheers,
EZ
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