Here's the big issue with contagion stories. They don't end quickly. Therefore every time there is a headline there is someone who says "I can't take it anymore" and sells our markets, no matter where our stocks are, particularly our financials, and no matter what's really going on in the epicenter, whether it be Spain or Ireland or Cyprus or Greece or now, Italy.
Now there was a time when the world's big banks were shakier and far more intertwined and the contagion story at least had some gravitas. That's no longer the case, but try telling that to the short sellers in the (XLF) today.
I get when, back then, there were reasons to sell off. Let's take the crisis in Italy seven years ago. At the time Europe's central bank was wrongly fighting inflation when the actual illness was deflation. The EU Central banker at the time was none other than the now disgraced Jean Claude Trichet, who raised rates twice right into the teeth of a Great Recession redux. Jean Claude Van Damme would have been a better central banker. Jean Claude Van Damme would have been a better central banker.
Italian bond rates hit 7.48% on November 9, 2011 on a different government breakdown, still very similar to this one, and that government turmoil caused buyers to avoid buying a government refinancing in the world's third largest bond market. (Get used to hearing that as it always freaks people out).
The spill over here was instant, catastrophic- Dow down 390 points from 12,170 to 11,780 - and ridiculous because, in retrospect there was NO IMPACT WHATSOEVER. That's because a new central banker, Mario Draghi, from the Italian Central Bank, no less, took over and started his bond buying program that made the Italian bond market among the best investments in history - right when almost every expert was telling us it would collapse.
The carnage before Draghi's appointment was, predictably, concentrated in individual financials all over the globe. But let's just stick to home with this oldy but goodie: JP Morgan's (JPM) stock dropped from $35 to $32 that down 390 day, before rallying a bit and then finishing November of 2011 at $28. A chart shows it was your last big opportunity before a quadruple in the stock. Can you imagine? A Quadruple. A faux European scare sends the world's premier financial down hard and then you get the most magnificent run imaginable in a big cap bank stock.
I am sure, right now, there are people selling JP Morgan and will sell it down to $100 or even $97 or $98 because they are afraid of something akin to the $35 to $28 run even as what they should be thinking about if the $28 to $119 run we've just enjoyed. That's not how it works, though. The panic comes first. I am sure, at $103 we get stories about Deutsche Bank (DB) about to collapse so don't be too aggressive.
Why does this happen? Some of it is because there's a mentality of whoever shoots first wins. We all would like to say "if nobody shoots, nobody gets hurt," but some hedge funds sense short opportunities and others don't like "the action" in the XLF and still others say that Europe will delay rate hikes so the net interest margin won't go higher. There are others, let's just call em "deep staters" who genuinely believe that our banks are beholden and on the hook to their banks. Remember when Societe General was supposed to be bringing down Morgan Stanley (MS) ? What a buying opportunity that was.
Now the reality is that European turmoil is good for business for our banks. Italy, itself, is under banked - there is no mortgage market -and wealthy people would much rather have their money in our banks than Unicredit (UNCFF) which is really the only truly solvent entity in the entire country. Plus, there are real reasons for Italian political weakness: horrendously interventionist government and an 11% unemployment rate. It is crazily and confoundingly regulated and it's so hard to do any business there without running afoul of the "authorities." That's why things don't end quickly in these kinds of crises. Too many moving parts. Plus, you have the endless Mussolini remembrances in the media, a total Chicken Little narrative that will gain steam in the coming weeks.
Altogether it's a picture that's too scary, and too frightening to refute, but refute I will do anyway. Why not? On that down 390 day I was on a panel in Michigan asking then-Republican presidential candidates about what they would do about the European debt crisis, particularly Italy. To a person the candidates said that the Europeans would handle it. Playing the journalist skeptic I scoffed at their lack of knowledge.
But they were right; it didn't matter. I just wish that one of us would have been bold enough to say buy.