Italian Elections, Sequestration, Europe, Iran

Prof. Mario_Monti

Prof. Mario_Monti (Photo credit: Wikipedia)

Despite Friday’s gains, stocks finished last week down to flat with the DOW rose .13% and is up 6.84% for the year, the S&P lost -.28% but is up 6.27% for the year while, the tech heavy NASDAQ was down 0.95%  but up 4.71% for the year.  Last week’s losses broke a previous seven straight weeks of gains.  The DOW reached a 5yr high last Tuesday.  The S&P is just 60pts. (or 4%) from is all-time intraday high of 1576 set back on Oct. 11, 2007.  While this market has climbed very far and at a blistering pace, the trend is your friend and the bias remains to the upside according to street consensus.  While a painful correction will become more likely the longer we go without one — if the Italian election outcome and sequestration don’t upset the apple cart — hard to see what will in the short-term.  I bought back into equities on Friday; but with covered calls at the 2.5% and 5% level — which will protect my downside if we do see a short, sharp sell-off.  Otherwise for now, it appears game on.  Gold is also looking more and more attractive here.






     That was the headline in Saturday’s Wall Street Journal article by Richard Barley.  But, for Mr. Monti to pull this out — he will need a lot of help.  Italy, is the third largest economy in the EuroZone and the importance of this election should not be underestimated.  Outside of Germany this fall, Italy’s elections are arguably the most important parliamentary elections in the EuroZone this year.  Will Italy continue to implement and adhere to economic reforms requested by the EU; or, will voters send a message that Rome needs to chart its own course, even if that means upsetting investors and the fabric of the EU?  Wall Street and the international investment community favor a coalition led by frontrunner Pier Lugi Bersani and current PM Monti believing that they would continue a path that would be acceptable to the EU and the investment community.  But, the fly in the ointment is the colorful Beppe Grillo’s 5-Star candidacy, a convicted criminal (manslaughter conviction in 1980) and comedian, who travels in a camper and uses profanity-laced triads that are beloved by the populace.  Beppe is surging into tomorrow evenings (Mon afternoon our time) close and could finish a surprising second.  Former PM Berlusconi is expected to finish 3rd with Mario Monti in 4th..  A Bersani/Monti coalition would be welcomed by the investment community, and a “hung jury,” (the most likely outcome) would also probably be seen in a positive vein.  Anything else could spell trouble for equities.



     The EU reported on Friday that the EuroZone economy shrank by 0.9% inc 2012 and GDP was -.5%. They forecast a -.3% economic contraction for 2013 and higher unemployment — to average 12.2% across the continent.  Unemployment is already close to 27% in Greece & Spain and the French economy is also in retreat.  And on Friday, Moody’s Investors Service stripped the UK of its Triple A credit rating, (lowering it to Aa1) predicting economic weakness for the forseeable future.  Some are predicting a triple dip recession this year.  Not everything is negative in Europe to be sure.  But, at what point does all this take its toll and begin to negatively impact the U.S. and China?  Or, will the U.S. and China keep Europe from shrinking further?  Will the payroll tax hike here and rising gas prices also spell trouble?  Lots to worry about.






     My note is too long, so just a quick point.  Iran claimed on Saturday that it had found significant new deposits or raw uranium — tripling the amount available to them — if true.  Meanwhile, Tehran recently sought (via China & front companies no doubt) to acquire tens of thousands of highly specialized magnets used in centrifuge machines (enough to outfit 50,000 new centrifuges) — about five times their current holdings.  It is unclear how successful this attempt was.  But, combine this with Iran’s chief nuclear scientist present at the recent North Korean underground nuclear test and……you can connect the rest of the dots. Good luck and good trading.  V/R, R.C. Porter.



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