Barrel of Rotten Apples
Research for Online Investors

by John Dalt

7/12/11

Overnight the markets were devastated by concern over Italian debt.  Spain was also starting to be mentioned as the next concern for a rescue.  It appeared that the eurozone finance ministers were losing control of the contagion spreading across the weakest countries in the monetary union.  Asian markets were off as much as 3%.  European markets were trading lower and futures pointed to a gap down for U.S. markets.

Ninety minutes before U.S. markets were set to open, a funny thing happened.  A rumor that the European Central Bank was ready to enter secondary bond markets and buy unwanted bonds gave hope that a floor had been set on bond values.  U.S. futures markets rallied, erasing most of the triple digit loss that was anticipated at market open.

Italian Prime Minister Silvio Berlusconi secured a pledge from the opposition Democratic Party (center-left) to support a package of debt-cutting measures.  Italy has the largest debt to GDP of any eurozone countries, but unlike Greece has been proactive in cutting government spending.  Their current deficit is only in the three percent range.

Bondholders are concerned about the size of Italy’s debt and the country’s ability to repay.  Since the company is not running a high deficit, they do not have to go to the market with new debt issues to finance day to day operations.

Italian Economy Minister Giulio Tremonti returned to Italy early this morning from a meeting with eurozone finance ministers to discuss the $57 billion package of budget cuts his government is preparing to pass in parliament.

Prime Minister Berlusconi issued a statement, “The actions under discussion in parliament will accelerate the reduction of the debt.  Already this year, we will bring the primary balance into significant surplus.”  Italy is the eurozone’s third largest economy and owes approximately $2.24 trillion dollars to bond holders.

Any increase in interest rates would increase interest expenses to the government budget, crowding out other spending.  The parliament hopes to pass the legislation on Thursday.

Interest rates on long term U.S. debt were lower early this morning.  This can be seen as a rush to quality.  Where do you go?  One TV commentator compared the current fixed-term sovereign debt market to a barrel of rotten apples.  U.S. treasuries are paying negative interest rates, but they are less rotten than issues from many countries.

Late in the morning, sniping came out of Washington concerning the debt ceiling negotiations.  Our position in TBT that rises with interest rates had a small move higher.

The market is punishing traders and investors right now.  Watch your trailing stops.  Our Long-Term subscribers sold one position into the rally for a 101.4% gain in 14 months!  We plan to buy it back in a few weeks at a “discounted” price.  SwingTrader subscribers closed two positions today, one for a 19.4% gain in four days, and the other made a 22.2% profit in two days.  Are these common results…No.  But you need a plan, why not use ours?  Our premium subscribers make money in the market.

At the same time China released their inflation numbers on Saturday they also released their balance of trade numbers.  China recorded a $22.3 billion trade surplus in June.  This was up from the $13.05 billion surplus in May, almost double.  Exports totaled $162 billion, up 17.6% over June 2010.  Imports grew at a 19.3% rate.  China will report second quarter gross domestic product (GDP) numbers tomorrow.  The first quarter grew at an annualized 9.7% rate.

The mailbag:
I love MarketToday and am amazed you come up with original content that is good every day.  Krauthammer can’t even do that!---Long-term subscriber J.P.

John’s reply:  His standards are higher.

You guys are full of it RE: Obama a socialist. The Republicans and wall street got this country into its worst depression since the 30's and are doing their damndest to cause a relapse! Wake up and realize who is really killing this country. Obama isn't perfect  by a long shot, but his biggest weakness is that he isn't strong enough , like FDR. He pays too much attention to so called "political realities". He should call the republicans out for what they are, a bunch of smug, self interested pigs who spout shibboleths and slogans but don't give a damn about the working person.---subscriber F.J.

John’s reply:  That is one view.  As a working person, I prefer economic freedom.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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