Friends,
We wondered why stocks were up yesterday given the turmoil in Italy, but were glad to accept the gains. We paid the price today, as the reality of the situation manifested itself in continuously higher interest rates on Italian debt. This of course, leads to the fear that the Italians at some point will not be able to afford the interest expense of funding their debt. The speed of the contagion from Greece, Portugal and Ireland to the much bigger Italy is astounding and disturbing. Where would the money come from to bail out Italy?
How does this all occur? Well, interest rates can go up for good reasons or they can go up for bad reasons. A good reason for interest rates to rise in a developed country like Italy, or the U. S. for that matter, is economic growth. Rates would rise during a growth spurt because central banks like our Federal Reserve would be inclined to take the foot off the pedal and begin raising interest rates back to more normal levels. They would want the rates somewhat higher to assure that inflation does not occur having been spurred on by growth. Rates going up for the wrong reason is what we are seeing in Italy today. Their rates are rising because no one wants to hold their bonds. They are perceived as being more and more risky. When investors don’t want to hold or buy your bonds, the only way to get them interested is to raise rates. At some point the yield is high enough to warrant the risk of buying the debt. The problem is that issuers of debt have a tipping point. If rates have to go up to a certain level, the issuer (Italy in this case) can’t afford to pay at that level. In Italy, 7% was thought to be the tipping point and rates got well above that today. Hence, the problem in world markets. Who is next? Spain, France then Germany? How about the good ole U. S. A.? If politicians aren’t moved by recent events, then change will come. One way or another.
As for the markets, the Dow Jones Industrial Average was down a whopping 389 points to close at 11,780. The S&P 500 was down more than 46 points to finish the day at 1,229. Gold was down for the day $29 and oil also gave up some recent gains down $.78 to close at $96 per barrel WTI. The dollar was the big winner today as our currency wins the” least ugly sister” contest. Of course, when the dollar rises, risk assets fall in value, hence the drop in stocks and commodities. As we talk about every day it seems, stocks seem to want to work their way higher, but are continuously reminded that Europe’s problems are not solved and you never know what you are going to wake up to, news wise, each morning. Obviously the Dow did not hold 12,000 and the S&P 500 did not hold the 1257 to 1260 area. It’s hard to determine the technical damage from one day of trading, but if we don’t get back above those levels by the end of the week, we will have to refigure the support and resistance levels.
We’ll let you know how things develop tomorrow. Try to have a nice evening everyone.
