What we really need to ask ourselves is how is my portfolio prepared for a European credit crisis? Just like the U.S. credit crisis dragged down foreign markets, believe a European crisis will do the same to the U.S. markets, especially the financial sector.
With recent debate over the need to aggressively ramp up the bailout fund of the European Financial Stability Facility in order to be prepared for bailout needs of EU members, the question is no longer when countries will need more bailout help but when?
Though Italy and Portugal’s financial troubles have come to the forefront recently, Greece still remains the main concern as the catalyst for a credit crisis. Last Tuesday, the yield on one-year Greek government bills hit 60 percent, yes, you read that correctly 60 percent!
Call me crazy but doesn’t it almost seem like Greece is borrowing from a loan shark, you know, at such a ridiculous rate that is basically impossible to service or ever pay down principal on. The Greek debt to GDP ratio is already 140 percent and climbing, the writing may already be on the wall.
I plan to keep my eye on the coupon payments due Tuesday, September 20 for the Greek 4.5 percent 2037s and 4.6 percent 2040s. The payment for both totals 769 million Euros. An interesting coincidence is that the September 2011 credit default swaps (CDS) expire on the 21st, therefore banks that have purchased insurance against a missed payment would be covered still and be paid out on that.
The real chances that Greece misses a payment is for anyone to guess, but something unpleasant will have to occur in order to progress towards a debt resolution. Maybe the IMF will continue to provide bailout funds so that Greece can make payments, but is that a good thing for the markets?
With that said, how do we prepare our investment portfolios for a potential downward shock? Well, remember that CASH is a position and it’s a position you may want to currently be in. There are dozens of quality dividend paying stocks out there and there dividend yields are only going to go higher with any subsequent declines in the market.
Think about this; you can buy quality utility stocks that are paying a better yield than U.S. Treasuries. If you buy them after large market sell-offs then possible price appreciation is now also in the mix
SIDENOTE: As I finish up this letter news has just hit that the S&P ratings agency has downgraded Italy to A from A+. Guess we should be watching more than Greece carefully after all. It will be interesting to see how/if this impacts markets tomorrow morning.