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ETF Periscope: PIIGS Flu Grows More Contagious

Posted on the 21 November 2011 by Phil's Stock World @philstockworld

PIIGS Flu Grows More Contagious

“The Edge… there is no honest way to explain it because the only people who really know where it is are the ones who have gone over.” — Hunter S. Thompson

ETF Periscope: PIIGS Flu Grows More Contagious
So maybe this is what EU contagion looks like up close and personal: a little bit more like a cold spreading randomly and widely, and not so much like a row of dominos falling in quick, rather neat succession.

Four months back, when the market stood tantalizingly close to its high on the year, a burst of bad news on the European front sent Wall Street well on its way down the path towards a 15% correction. Greece became the poster child of the dangers of running a government on way too much debt, and the question of how much it would take to bail out the Greeks — for the second time in a little over a year — seemed to be the logical question at the time.

Now, four months later, Wall Street has become a greater bundle of nerves than at any time since the crash of ’08, jerking upward or downward at light speed in response to the good, the bad or the ugly round of news emerging from the Continent.

Last week it was primarily bad and ugly. The Dow Jones Industrial Average (DJIA) ended the week down 2.9%. Meanwhile, the S&P 500 Index (SPX) fared worse, losing a substantial 3.8%, while the Nasdaq Composite Index (COMP) topped the sad list, shedding a hefty 4.0% on the week.

If there is really any question that the market has become predominantly Euro-centric, it could be answered by taking a look at what happened over the course of the last week.

On the U.S. economic front, there was mostly good news, certainly enough of the kind that has, in the recent past at least, sent the market upwards.  Economic reports out of Washington indicate that initial jobless claims have continued to move lower, the sort of trend that investors tend to pounce on in a Bullish sort of way. Not only that, retail sales continue to indicate the economy may be picking up some steam, as that indicator was up 0.5%.

However, all these numbers managed to do was to provide some ballast for a wobbly ship that seemed rather intent on going down in response to the level of doubt that the PIIGS (Portugal, Ireland, Italy, Greece and Spain) continue to invoke.

The latest point of focus was last week’s sale of both Italian and Spanish bonds.

Italy is the euro-zone’s third largest economy. As well, it holds the illustrious distinction of having the world’s fourth largest amount of debt, at $2.6 trillion dollars, trailing only the U.S., Japan, and Germany. The fact that its 10-year bond yields spiked over 7% was a key factor in last week’s sharp drop on Wall Street.

Spain, which owns the EU’s fifth largest economy, came scarily close to that level as well, which was a co-factor in the major indexes losses. These yield levels are politely referred to by the financial press as “unsustainable,” basically meaning that all sorts of stuff will hit the fan unless these countries can convince the bond market to lend to them at lower, more “sustainable” rates.

The fact that Greece has moved off the front burner of awareness and has been replace by Italy and Spain, is worthy of note, as any bailout of Spain and, even more significantly, Italy, would require an amount of funding that would dwarf any past, present or future Greek bailout. In fact, it would likely represent an amount of financial firepower that might actually be impossible for the EU to generate without imploding.

There may be some hope, however, at least for the short term, as all three EU member-countries have newly elected leaders. Spain, which held elections over the weekend, has voted in an apparently more conservative government which, in turn, may be what will convince investors that the EU crisis can be controlled.

Or it may simply become a case of allowing Wall Street to jerk its collective knee upward for perhaps another day or two.

But be warned: With the low volume of trading that was seen last week expected to continue into the upcoming short holiday week, extreme reactions, which of late have been as much the rule as the exception, may become even more amplified than normal.  And, in this high volatility atmosphere, that amplification may reverberate louder than an oversized bass speaker in a small car.

ETF Periscope

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