Thursday, November 10, 2011

Thursday Thoughts

Run, don't walk, to read and listen to Knowledge@Wharton's takes on the crisis in Italy and in the eurozone.

Credit Swiss conclusions:

* Italian Parliament will pass the agreed upon austerity measures this weekend.
* The ECB will then step in and act as the "lender of last resort" and buy up Italian bonds (taking yields back down). The new ECB President, Mario Draghi is Bernanke-like and will continue to cut interest rates sooner than later.
* The euro will drop in value relative to the U.S. dollar, forcing the Fed to engage in QE3.

Their investment conclusion: "prepare to hold their breath, plug your nose and buy risk assets (just like summer/fall of 2010)."

The 30-year auction today was weak (at high yield and at a bad bid-to-cover), and long bonds are down 3 on the day.

We might be in the early phase of the reallocation out of bonds and into stocks.

The way to play this?

Buy asset managers such as WDR, TROW and BEN.

Another beneficiary of higher rates is the life insurance group, the valuations of which have been challenged by low interest rates (as it hurts the group’s marginal investment portfolio returns).

Here is the official statement from Standard & Poor’s on France's rating:

As a result of a technical error, a message was automatically disseminated today to some subscribers of S&P’s Global Credit Portal suggesting that France’s credit rating had been changed. This is not the case: the ratings of France remain AAA with a stable outlook, and this incident is not related to any ratings surveillance activity. We are investigating the cause of the error.

Some possible negatives to consider:

1. The crisis in Europe is very close to reaching the point of no return.
2. The steep contraction that Europe is about to encounter will drag the U.S.’s teetering economy back into recession.
3. For the first time in U.S. history, the Fed has no ability to effectively stimulate the economy.
4. Deficits will worsen, U.S. debts will grow, and downgrades will follow.
5. Global deleveraging will accelerate, U.S. banks will recoil, loan growth will stagnate, and spreads will continue to compress as Treasury yields move lower.
6. U.S. equity valuations do not discount points 1-5. Being the tallest dwarf is not a good argument.