Ahead of the open,(7-11)

Yesterday’s opening Journal paragraph started to play out overnight as Italy took over the front pages from Greece with its 10 yield shooting up to 6.65%. Importantly, as "amazingly" last week with the market not alarmed, the market was “taking this in stride” once again even with 30bps rise into dangerous (bailout) territory, while the SP rose to 1261 (+8). Part of the market seemingly being immune is the fact margin requirements were not changed (yet?), changes would likely provoke selling and we’d see 7% as margins get raised. It’s also possible it’s too early, a few days at these levels may change everything for the world’s 3rd largest debtor and market. A ‘no’ vote on some Italian budget measures Tuesday would likely cause yield surge and risk asset sale. Expecting more Pre/post vote erratic trading.

The good thing for traders is if Italian yields go down, it may give market fuel to move further.

Interestingly, Berlusconi possible exit was viewed as a positive (see below Greece), but this would likely bring on elections instead and would cause all austerity /reforms to be put on hold for a few months= more uncertainty in regards to Europe. A Greek style unity gov’t is an unlikely ‘positive’.

Do note R2K closed in the red (many times a sign of empty rally) and the reasons cited for afternoon melt up were numerous, but not one was really worthy.

Not much on single stock action off specific news/ earnings as market awaits CSCO ( 1st major end October data point report) on Wednesday.

Ahead of the open, (9-11)

..no more Bunga Bunga

Much to this trader’s chagrin, firstly watching a muted reaction to Berlusconi’s exit, followed by a late rally in the US markets has reversed dramatically at the European market open. If you looked at 10yr bonds following word of resignation, you’d see the dislocation. Call it an early sign the US markets were naïve and wrong as optimism has dissipated quickly.

Although, it was ‘yes’ vote on the Italian 2010 budget, it was still a ‘no’ vote as it’s forcing Berlusconi to step down. “...would cause yield surge and risk asset sale.”. As discussed, PM’s exit = more uncertainty for Eurozone and this morning markets realize this with yields skyrocketing to >7.40% with ECB intervening after margin rates were first raised in France. Deposit charges on 10yr went to 11.65% from 6.65% on the LCH clearing house arm.

Away from the Armageddon in Europe, which now enters a new ‘unknown’ phase, the US markets ironically tested the ~1275 resistance area and now will have an even tougher time to get over it in the future. Start looking at supports noted this weekend. Total denial by markets recently may reach a boiling point.

Ahead of the open, (10-11)

As discussed for a few days as to how the market remains in denial was answered today in a bloodbath..”..It’s also possible it’s too early, a few days at these levels may change everything for the world’s 3rd largest debtor.” …and of course the market would follow. SP500 -47pts to 1,229, DJIA -389pts to 11,781, NASD-105.84pts to 2,622 and R2K -36 to 719 (which led the ride as mkts had their biggest decline since mid August, although market seemed less panicky than August b/c eventually (as always before), things will be fixed is the motto…

However, in this view, what was before was a solvency problem with Greece etc, Italy is a growing liquidity problem. Liquidity problems lead to monies not loaned to US companies etc.(last week saw loan surveys pointing to taps being closed for some US co`s dealing w Europe) and a Lehman situation arises. That`s how recessions grow from overseas, as noted other day `big`Europe is in a recession already (note only a analysts have stated this publicly last few days, so it`s only personal opinion from recent eco`data out of Europe) and today we saw GM blame Europe and GDP was lowered by a tier 1 financial after eco`numbers today showed US is not immune…so, question has the dam broken and the spill started from across the Atlantic. Oh yeah, earnings were horrible today, it’s possible to list 10+ single stocks(lots nasd tech stuff) that succumbed badly to bad earnings, although CSCO was quite positive AH’s.

Maybe this spillage realization took the market from down DJIA 300pts to 190 and back down to 400+ , instead of the usual afternoon rallies recently that were hyped all over the media today. Once this buying after Europe closed was not playing out in the afternoon, selling picked up last hour. Correlations were high with all sectors-stocks, all were hit.

Note there are plenty of so-called solutions (ECB, IMF, unity gov’t in Italy) to Europe-Italy, so market can rally at any time, but the question is will it come quick enough or be big enough (if ECB,IMF) to keep contagion away and not affect US corps’.

Into the trading week, (Nov14-)

Heading into last week’s trading, cited.. “A fresh and likely biggest wary to look at is Italian bonds/yields. ECB is intervening holding it below critical 6.5%, if it gets above it may trigger margin increase changes and the consequences (financial stresses) are inevitable and are unknown.”. Incredibly, it seems the entire the ‘Italian’ story unfolded soon after and played out in the next 5 days from beginning to end, you may say. First, yield pushing above 6.5%, soon quickly to ~7.5% on margin increases and by end week back down below 6.5% with markets indices following in sync, while hitting the SP resistance and support levels laid out on the spot.

What’s really amazing is how fast the Italians moved to calm the financial markets from abyss vs, ie. Greece, which was an unexpected event (passing reforms through house and creating a unity gov’t in just a few days vs. going to elections and dragging everything with it), allowing the market to finish incrementally higher on the week. Yes, they may go to elections still, but it’s not an immediate factor now. Now the question is how Italy is assisted with its funding down the road if yields stay high, IMF/EFSF together is likely not enough. ECB powers in?

What the week did was demonstrate the market is still .. “taking this in stride”, as far as the European crisis. Despite the mid-week bloodbath day, markets didn’t even hit the prior week’s low achieved off Greek referendum news. Also importantly, as noted after the biggest decline day since mid-Aug,..” market seems less panicky than August b/c eventually (as always before), things will be fixed is the motto”. Ahead, any dip off any more sell offs stemming from Europe will be looked on as buying the dip opportunity again as US market showcases it’s resiliency and decoupling from European headlines.

Ahead of the trading week, still concerned with the underlying tape (see Friday’s ahead of open view). Note despite strong rally Friday, R2K and Nasdaq finished in the red for the week as higher beta (momentum stocks) still lagged. Also, financials were very strong during October rally are not participating here. Looking for these factors to change to get over 1275 SP.