Market Overview

Arrivederci, Roma

What was a great song by Dean Martin now looks like a living hell for the financial markets.

There are fears that Italy is the next shoe to drop and it looks like it is getting worse by the day.

Art Cashin just went on CNBC and said that Italy could be "too big to be bailed out," not even Germany can do it. With over $2 trillion in debt, Italy is the third largest debtor nation in the world, behind only the U.S. and Japan.

Every other day, Italian banks are halted for dropping sharply. We could see the oldest surviving bank in the world, Italy's Banca Monte dei Paschi di Siena fail. The bank has been around since 1472, but nothing matters in this market, with every bank being sold off sharply.

Italian Prime Minister Silvio Berlusconi is going to give an address today to the nation at 5:30 local time to discuss the situation going on in the financial markets,

In reports from Reuters and reprinted by ZeroHedge, "Prime Minister Silvio Berlusconi will address parliament on Wednesday seeking to calm escalating market fears that Italy may be dragged into a Greek-style financial crisis that would threaten the euro zone. Italy's Economy Minister Giulio Tremonti met the chairman of euro zone finance ministers, Jean-Claude Juncker, for emergency talks as the yields on Italian and Spanish 10-year bonds flirted with new 14-year highs. Berlusconi, weakened by scandals and largely silent over the past weeks, delayed his address to the lower house, originally scheduled for 3.00 p.m. (1300 GMT), to 5.30 p.m. after the close of the Milan bourse." Reuters goes on to say, "It is not clear, however, whether he will have any major new structural reforms or one-off tax measures to announce."

Spreads on Italian 10 year debt over German bunds (considered to be the safest in the EU) are blowing out nearly every single day. 10 year debt now yields over 6%, and it seems as if the country is collapsing in on itself at this point.

Earlier, the Wall Street Journal said that Italy could withstand a bond storm for a while, but the question is, how long is a while? It is getting worse and worse everyday.

Benzinga has talked about how to play an Italian default. If the Germans, the French and Luxembourg are not able to save Italy through the Euro Financial Stability Fund, then China will need to be brought in to save the day.

China did invent past, but the Italians perfected it. Now it looks as if China is perfecting the takeover, which was first invented in Rome and the Roman Empire.

Everything is a circle, just now how everyone thought it would play out.

Now to enjoy some Dean Martin before it's too late.

ACTION ITEMS:

Bullish:
Traders who believe that Italy will not default and will ultimately be bailed out by either the EU or China might want to consider the following trades:

  • Going long the Italian ETF (NYSE: EWI) at the height of the crisis in the media may make sense as it will not be long before Italy is bailed out once the news hits the precipice.
  • Go long everything in the S&P 500. We have lost 1,000 points on the Dow and 100 points on the S&P 500. We are so oversold it is not funny, and any mention of Italy being saved could provide the fuel for a massive snap back rally.

Bearish:
If you agree with Art Cashin and that Italy might be too big to be bailed out you may want to consider alternate positions:

  • Short Italian banks at will. All of them which plunge sharply if Italy can not be saved.

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

Posted-In: Long Ideas Bonds Short Ideas Wall Street Journal Politics Economics Markets Media Best of Benzinga

 

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