FYI | Nov 11 2011
10th November 2011
By Peter Switzer, founder of the Switzer Super Report
It was always going to come, and now Italy has become the new Greece. While stock markets cheered the end of Italy’s PM Silvio Berlusconi yesterday, today’s focus is: will the European Union rescue Italy?
European officials are saying “no”, and that has rocked the markets. But is this the making of another buying opportunity for the courageous and consistent long-term investor? In case you don’t like drawn-out dramas — the answer is ‘yes’, but timing could be crucial.
The Dow Jones lost more than 389 points on Wednesday night. The driver of that was the fact the EU has no plans to rescue Italy based on quotes from unidentified EU officials. This is true to form, so you wouldn’t doubt they said it, but it doesn’t mean that some kind of assistance isn’t forthcoming.
Worryingly, the European Central Bank (ECB) did try to take on two-year and 10-year Italian bonds to keep rates low, but they lost out with the yield on both going over the key 7% level, which was the trigger for rescue plans for both Greece and Portugal.
Making matters worse is the fact those nincompoops in the Greek parliament can’t decide who will be the interim Prime Minister. At one stage it was thought someone had been selected, but then this hope for Greek maturity and understanding was whisked away, as per usual.
There’s also worries about who’s going to replace Berlusconi. The trouble for Italy, and the same goes for Spain, is that they are too big to fail. The Italian Parliament will have to take action to allay the fears of lenders, but more will be needed and the ECB is going to have to take a role – and I’m sure this will happen.
Christine Lagarde, the boss of the International Monetary Fund (IMF), has made the point that Europe’s plight could infect the global economy. She is calling on the other nations of the world to help with the solution or else we will all have a “lost decade” of economic growth. She is underlining how pathetic the G20 meeting was last weekend and how an Italian solution can’t be left to end up being a rerun of the Greek debacle.
So, where’s the buying opportunity?
Well, it is fraught with danger to try to work out the timing of the Italian solution, but one will come, even if it is IMF-created. The tactic here for the long-term investor is to buy the companies you have earmarked as long-term holds and pick them up when the share price falls with the negative sentiment.
There is no question that the safest and most intelligent stock play for most SMSF trustees is to buy great dividend, fully franked plays and the lower the entry or dollar cost-averaged price, the better your yield will be.
My guess is that an Italian solution will eventuate and there still could be a ‘Santa Claus rally’ in the US, but eventually, what is today an Italian story, will become a Spanish tale of woe – the volatility is not over.
However, sometime over 2012 there will be a belief that a reasonable rescue plan has been created for Europe and the stock market will take off in anticipation that 2013 will be the line in the sand when the bulls really take over.
By the way, in October, Wall Street went up by more than 20%, which means there has to be profit-takers in the big funds ready to dump stocks when the news is so frustratingly bad.
That’s why buying great dividend-paying companies when the dips or sell-offs happen is the courageous and wise play.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
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