What do you do when a market melts down

It took me a while to understand the issue that caused the market meltdown today.  I felt like this came a little out of the blue.  It didn’t but I was being lazy and not reading ft.com and other publications that focus on Europe.

Bad mistake.

The best article that I have found so far that talks about the crisis was written by FT Alphaville.

Its a crisis of confidence.  Trichet came out yesterday and said the ECB wouldn’t be the buyer of last resort for Italian bonds.  That means that for the next month or two, or until the euro-government backed facility to buy euro-government debt is approved by the european parliaments, there is no lender of last resort.

That freaked the market out.  What’s worse, its a case of perception creating its own reality, because while Italy is not in as bad of straits as Greece (it has a budget surplus), it can’t afford to pay skyrocketing interest payments.

Any way you cut it, what is happening in Italy doesn’t look good.  The chart below is the widening Italy CDS.

I sold some stocks yesterday. Grudgingly, but I sold some of my non-core positions like Geologix. I can’t possibly know how this is going to turn out.  The prudent response is to reduce risk.