Tuesday, November 30, 2010

S&P Puts Portugal on Review for Possible Debt Downgrade

It looks like another one is about to bite the dust:

"Standard & Poor's Tuesday put Portugal's A-minus credit ratings on review for a possible downgrade, citing uncertainties related to a possible recourse to EU/IMF funding by the country.

"If Portugal does seek an external support program and if we believe private creditors will be subordinated to public creditors, or if Portugal's fiscal or growth prospects weaken further, we could lower the long- and short-term ratings," the ratings agency said in a statement."

My Take:

Portugal's Prime Minister is attempting to deny that it will ask for a bailout but it's too late at this point.  The bond market has spoken.

Portugal's yield soared today to over 7%:

Spain also saw yields on it's 10 year rise 7/10's of a point up to about 5.5%:

Portugal can say they are fine all they want.  The problem is you cannot afford to finance your government when you must pay a 7% yield on your sovereign debt.

The bailouts of Greece and Ireland allowed them to get their yields down into the 5% range which makes their government funding feasible as long as extreme austerity policies are implemented.

As you can see above, Spain is right on the edge of being in trouble as their yields hover in the "danger zone" of over 5%.

Italy is now close to entering center stage on the sovereign crisis map as this debt contagion spreads:

"Italian and Spanish government bonds fell, driving the extra yield investors demand to hold the securities instead of German bunds to euro-era records, as Europe’s debt crisis intensified.
The drop pushed the yield spread between 10-year Italian securities and similar-maturity German debt to more than 2 percentage points for the first time since 1997.

The Italian 10-year bond yield rose a sixth day, gaining three basis points to 4.68 percent at 4:34 p.m. in London, after reaching 4.88 percent earlier today. The 3.75 percent security due in March 2021 fell 0.26, or 2.60 euros per 1,000-euro face amount, to 92.89. The spread with 10-year German bonds increased to as much as 212 basis points, a euro-era record."

Take Continued:

As you can see folks this debt contagion is spreading like wildfire, and the world's financial system hangs in the balance as the EU and the ECB frantically try and contain it.  Like suprime, it remains unlikely that this crisis will ever become contained.

This is a very serious situation folks.

Anyone thinking of buying stocks at this point needs their head examined.  

One thing IMO is very clear right now as I look at the markets: Our trading robots over here in the US are NOT painting the correct picture as to how much trouble this crisis represents.

Just look at how erratic the trading was today on the ES:

This chart looks absolutely mangled.  The only way you would ever see this much choppiness was if you flew through a Category 5 hurricane in a four seat airplane.  The tape looks ridiculous and completely manufactured.  I will leave it at that because you guys know my thoughts on the market right now.

I will end with a chart of Bank of America:

Supposedly this is "the bank" that the Wikileak was talking about.  I wouldn't be surprised if this is true especially when I see the tape.  Of all of the TBTF banks, I think this one is in the deepest trouble because the worst of the group was backstopped(Citi).

Bank of America swallowed more garbage than a sanitation dump when the Fed basically forced them to eat Countrywide and Merrill Lynch.

This bank is definitely insolvent.  Keep in mind that Merrill reported a $20 billion dollar loss in the 4th quarter alone when it was acquired by Bank of America.

The Bottom Line

I didn't even get a chance to touch on the Case/Shiller number today which came in way below expectations.  Prices dropped .8% percent in Septemeber versus the consensus estimates of a  .3% percent drop.

Needless to say there is no surprise here on the miss.

Forget about housing at this point.  Stay focused on Europe folks.  This is as serious a situation as the Lehman collapse was in 2008. 

Try and ignore all of the noise in the stock markets right now.  They are not representative of what is going on in the world markets. 

Stay focused on the bond market and currencies.  They will guide you much more intelligently than the manipulated stock market that's filled with nothing but speculative robots that hold positions for seconds at a time.

Disclosure:  No new positions held at the time of publication.

1 comment:

HeatherH said...

Bank of America is surely full of messy junk of mortgages, FED trying to pump dollars and prolong the suffering. But tha weak EU states can't really go bankrupt...not with the EU current policy anyway, so what's the point in lower ratings? More risk premium, higher yields...Doesn't help people, does help investors...