Another Downgrade

by Larry Levin

The market was roiled Tuesday with the Standard & Poor's downgrade of both Portugal and Grecian debt - the latter to junk. As I wrote yesterday the cancer is contagious, and today it spread to Spain. This morning the market was shocked again when Spain's sovereign debt was downgraded - not to junk status - but knocked down a peg.

Will Italy be next? We may find out soon.

Italy plans to raise about the equivalent of $8 billion soon by selling sovereign debt maturing in 2012, 2017 and 2020. This will be the first sale since the aforementioned debt were slashed this week. In anticipation, yields on Italian bonds have risen to the highest since April 2009 relative to German bunds.

“Italy will feel the heat given contagion is rife,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate and Investment Bank in London. “It would be fantastic if the sale goes well as Italian bonds are normally the safest among euro-zone higher yielders. I don’t see that happening right now. I don’t envisage a failed auction, but it’s not going to be easy.”

Even Germany has recently suffered a failed auction, so the Italian auction should be interesting.

New York University professor Nouriel Roubini recently said, "While today markets are worried about Greece, Greece is just the tip of the iceberg, or the canary in the coal mine for a much broader range of fiscal problems. Increasing tax revenue won’t be enough 'to save the day.'"

“The thing I worry about is the buildup of sovereign debt,” Roubini, who teaches at NYU’s Stern School of Business, told attendees at the Beverly Hilton hotel. If the issue isn’t addressed, nations will either fail to meet obligations or experience higher inflation as officials “monetize” their debts, or print money to tackle the shortfalls.

Buildup of debt? Monetize debt? Print money to tackle shortfalls? Hmmm, sounds a lot like the USA.

“Eventually, the fiscal problems of the U.S. will also come to the fore,” Roubini said. “The risk of something serious happening in the U.S. in the next two or three years is going to be significant” because there’s “no willingness in Washington to do anything” unless forced by the bond markets.



Previous Day's Trading Room Results:

Trade Date: 4/28/10

E-Mini S&P Trades*
(before fees and commissions):

1) VA buy at 9:08am @ 1182.50 = +.50 & +.25 (2 lots)

2) Algorithm positions (12)

3) “Reading the Tape” positions (0) …combined Secret’s, Algo, & “Reading the Tape” total…+0.00



Sign up as an AvidTrader Member to receive "The Technician" Value Area's each day. The market then has an 80% chance of filling the Value Area. Many traders familiar with the Value Area and the techniques that go along with it use it to help them decide what trades to do each day. Join and see how this technique can help you trade more successfully!