Focus on Italy and Spain. Repeat after me....the magic number is 7%

This week let me start with a question to all of you.

Where can you find 4 over qualified investment professionals talking rubbish?

Answer: CNBC

Sitting in front of my tv watching idiot after idiot going on global network tv spouting absolute trash, pushed me to writing a post even though I have so much on my plate.

The US markets are currently registering their 9th straight day of negative returns and everyone in the world is pointing to the debt ceiling "soap opera" and weak US economic data as the key reasons to why the market has been so weak.

Utter rubbish. If you felt that there was a chance that someone was going to either get downgraded or default on the debt, what would you be looking for? Higher interest rates to compensate for the risk you are taking by lending money to them right? If your answer is not the same, please take a course finance 101, either that or quit investing.

Look at the US Treasury 10 Yr yields! They have been trending down since 9 days ago, does that seem normal for a country that may default. For the better part of 2 weeks, I have kept my mouth shut about how stupid the press are, on focusing on the US political drama rather than the important developments in Europe.

Not going to spend too much time writing this note because I fully expect all of you who are interested in the markets to be watching the same things as I do. Look at the Italian and Spanish 10 yr yields. They have risen significantly and now they are both teetering on the brink of possible insolvency as the debt servicing burden starts to become too heavy for these two gigantic European economies.

Bear in mind, both Italian and Spanish Yields are now trading at 6.22% and 6.36% respectively. Credit default swaps are getting more expensive for them and their spreads against the German Bunds are at all time highs since the Eurozone was formed. Why am I mentioning all this? Because the magic number is 7%. Why 7%? Should I just let you guys guess? Nope? Ok. 7% was the level when Greece started asking for help from the European Central Bank. Bear in mind, the amount of outstanding debt which Spain will need to help servicing is equivalent to Greek, Portuguese and Irish debt all added together. Italian debt is even larger. Get the picture now?

Am I concerned? Yes. I hope to God that I am wrong. Trust me, that does not happen often considering how much satisfaction I get when proven right. But the last thing I want to see is a re-enactment of 2008. In my meetings with my clients in the past, Spain was always the wildcard which I felt would mean all bets are off if it fails. A double whammy in the form of Italy and Spain is really something that scares me.

What can be done?

1) The European Financial Stability Facility (EFSF) gets additional 2 trillion worth of funds to backstop all European debt needs.

2) Blanket Guarantee by the ECB on all Eurozone member bonds. A buyer of last resort for all bond issues.

3) Break up the Eurozone

Options 1 and 2 are going to have short term effects on the market but it will bring some confidence back into the markets and also deter speculators from taking bets on an eventual default by Italy or Spain or both.

Option 3? Unthinkable. If it happens, we are really going to see 2008 all over again. Don't want to even think about the possibility of that happening.

Lets hope we see a strong and high conviction move by the ECB or EFSF to support Italy and Spain soon.

Earnings have been robust for the S&P500 companies this earnings season but it has absolutely no effect on the market. Guess what, even more job cuts. Just in the banking sector alone we are going to see more than 50000 job cuts. Bad signs...

Ok thats all I wanna say this week. Will not be updating regularly due to additional commitments for the moment. Have a good time ahead!

Best,

SVI