Wednesday, July 6, 2016

Italian Banks and Property Funds

So the latest news scare comes from Europe, again.  This time, the media is in a frenzy over the Italian banks and UK Property funds.  For some bizarre reason, you had investors who were invested in UK property funds who thought they could sell them like stocks.  Real estate is considered illiquid for a reason.  It doesn't trade on a minute by minute basis.  There are no daily settlement prices.  To those who are freaking out by saying the fund managers are freezing redemptions, making the analogy to Bear Stearns funds from 2007 are really stretching it here.

Property funds are not the same as hedge funds investing in structured financial products.  And Italian banks don't have a contagion risk like AIG and Lehman.  These Italian banks are unprofitable, and need to be recapitalized.  They are not holding a mountain load of toxic debt freezing the credit markets.  Lastly, you are so far into the central bank superhero theme that an Italian bank bailout is a when, not if proposition.

Not saying this market is great, but it is not as bearish as the media make it out to be.  And do not underestimate the resolve of Draghi to come up with something to prop up the European equity markets, and thus, the US equity markets.  And yes, the Fed is out of the picture.  They will be talking dovish for the rest of the year.  The central banks still rule the world, and they have a perfect excuse in Brexit to go bananas with their monetary stimulus.


Anonymous said...

Market Owl,

I like the behavorial, psychological way you read the market. You put things in a larger context, for exemple, when you wrote : "Those who think low bond yields are sending a bearish signal for equities is confusing the "flight to quality" bid with the need for yield bid." Yeah !

SPX is slowly getting interesting. (Sentiment, Put/Call, Vix, Price). Maybe next week it will be time to try a small short.
It's very hard to do nothing. I shorted few XLU yesterday. I bought few GBP. I needed to do something, because I feel frustrated. I can't take your advice about a long vacation :)

Bonne journée.

Market Owl said...

Yes, shorting XLU and long GBP looks like decent trades. I don't see much right now, maybe in a couple of weeks if S&P is close to all time highs.