A Conspiracy of Caricatures

 | Oct 31, 2011 | 7:03 AM EDT
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When I saw the headlines, I thought they were a conspiracy of caricatures. I am talking about how all of the "Italy Dampens" and "Italian Woes" stories that dominated the headlines this weekend.

It was as if:

1. Nothing good had happened at all.

2. The Germans and French have only been focused on Greece when the real issue is Italy.

3. When they focus on Italy, the real issue will be Spain.

These were cartoons because, of course, these articles had to be written. Did anyone expect "Looks Like They Are Now Also Getting Closer to Solving Italy" headlines? These articles might as well have been written by short sellers who were anxious to put the genie back in the bottle.

Now, let me give you the requisite boilerplate. I have acknowledged that the problems involving sovereign bonds and French, German, Italian and Spanish banks are currently insurmountable -- but the key word is "currently."

Remember, the issue here is and has always been about who can take the hit. We've learned, with Fannie Mae and Freddie Mac -- two amazingly stark private capital trashings in the U.S. -- that you can force the hit for certain.

But what matters is: When the hit is taken, can enough institutions survive to keep the economy going? We can't have all the banks go under without a severe recession getting triggered. The longer this goes on, the less of a hit many institutions are going to take, because they can offload the bonds at losses and still live to play again.

For example, every time you question Societe Generale, which is the most questionable because of its well-known aggressiveness, you hear the bank could write down its whole sovereign bond portfolio without a problem because they have so many good equity holdings to sell.


That's cool.

I am saying, though, that if SocGen could have the time to sell some of those equity holdings and raise cash, it wouldn't be in the rumor mill every minute. The deal last week allows time to spread out the losses and raise capital.

Now, mind you, if capital isn't raised and equity isn't sold and the Chinese don't come in and the International Monetary Fund screws up and gross domestic product falls off a cliff, then we are in terrible shape. I am just saying that what happened last week minimizes the likelihood of such a sour outcome.

Already, just by dragging everything out so far, the U.S. money market institutions were able to drastically cut back their exposure. That's terrific. Plus, the credit default swap figures I've been seeing of late are showing a big decline in coverage.

That's what happens when people close out positions and take the hit. Things get better.

The headlines are right. There are woes beyond Greece. No one ever said there weren't. This idea -- that it's suddenly revelatory that Italian bond yields have risen -- is incredible to me. Of course, the bond vigilantes are out everywhere. They are coming here now, too.

Just be aware that sometimes good things do happen.

Remember, last I looked we are not seeing the Dow at 6500. It's almost 6000 points higher. Those points happened when Italy and Spain and Greece were in trouble.

So, when the market dips on this "news," remember that many funds need the breather to get in.

I bet they'll take it.

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