What I am going to do Tomorrow
Well first, let me just say, that I don’t know what I am going to do tomorrow. There are so many moving parts this weekend that it is confusing at best and impossible at worst.
We all know about the S&P downgrade. There are a lot of predictions that the market will open down big on Monday because of the downgrade. Maybe it will. The thing is, nothing that I have read so far has described how an S&P downgrade would lead to systemic problems. One article I read pointed out that there are very few structured deals or convenants that refer specifically to the ratings of one agency. According to the article, almost all rely on a consensus downgrade among all rating agencies.
The fallout from the S&P downgrade appears to be mostly psychological. Now no doubt that the market could go down on that psychological hit. But it would be foolish I think to sell on that alone.
What makes things confusing is that the S&P downgrade is not the only question mark out there. What I pointed to Friday with regard to Italy and Spain, has not been settled. While the ECB has appeared to agree to buy Italian and Spanish bonds in the short term, there was a report from the German paper der Spiegel on Saturday that said that the Germans were balking at using the EFSF (European Stabilization Fund) to buy Italian debt. What this highlights is that there is really no longer term solution yet for dealing with the European problems. Markets aren’t going to like that.
What is going on in Europe is bad because it has potential real consequences. If Italy or Spain blows up, banks that hold their debt will blow up. Then banks will pull back on loans, cash will be raised, and the knock on effects will likely be much like what happened in 2008.
So its all about Europe in my opinion.
Even if the market does open down big on Monday, you will have to try to sort out why before you can act accordingly. It will be important to watch what Italian and Spanish CDS does on Monday. If they are not falling, I think its worth continuing to pare back. You could also buy some HSD.to to help hedge. However, if it appears that there has been some at least short term resolution to the problems in Europe, I would be tempted to hold on through a slip in stocks that was due to the S&P downgrade. I don’t think that it will last.