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Italian contagion? Oil, Italy’s populist shift shafts Wall Street

Written By | May 29, 2018

WASHINGTON. It’s hard getting a handle on the kind of freakazoid stock trading action we’re seeing on Wall Street on this Tuesday after a holiday weekend. At its worst point of the day (thus far) the Dow was down over 500 points. The broader based S&P 500 fared a bit better, and the NASDAQ was holding its own, although it’s still off nearly 0.7 percent on the day as of 3:30 p.m. ET. Lower oil prices and Italy’s populist shift – the Italian contagion – combined to shaft Tuesday’s trading action. Big time.

As often happens over long holiday weekends, big news thundered across news desks while markets were closed. It wasn’t the kind of news that would directly affect you and me. (Though it could later on.) But it was the kind of news that freaks out big time traders and investors.

And it sent the super-computerized machine trading combines into a frenzy of selling. (And perhaps shorting as well.)

Those two big news items we’ve already highighted:

  • Our Saudi and Russian friends are likely to goose oil production quotas, which they’ve minimized for the better part of the year in order to increase the price per barrel. This likely pact, announced roughly mid-week last week, has been killing the per barrel price of oil on the market and terrifying U.S. producers and frackers. They’ve been drilling wells like there’s no tomorrow and going into hock to do so. Potential overproduction, aided and abetted by our pals abroad, could cut prices to the point where marginal U.S. producers would be in a world of hurt. Meanwhile, the Saudis and Vlad Putin need the petrodollars. End of explanation.

Last week, Brent crude was priced well over $80 a barrel, while WTI was already in the mid $70 per barrel range. Today, Brent is hovering around $75. WTI is off roughly $10 from its high point last week to currently stand (as we write this) at $66.76. These are YUGE moves, particularly in such a short period of time. Very scary. Sell oil!!

  • As for that Italian contagion. Our Italian friends have been doing a Donald Trump-style election in slo-mo. A pair of strange bedfellows – in a bizarrely constructed populist-style voter revolt, an anti-Euro upstart party and a formerly ignored conservative party ended up winning Italy’s latest parliamentary elections back in March. They’ve been trying to put a government together ever since. After proposing an essentially anti-Euro politician as their compromise prime minister, Italy’s current president exercised one of his few prerogatives and appointed his own PM to head the still unformed government. The new PM: An actual IMF official. In other words, Italy’s president ignored the March vote and appointed a Deep State outsider to the PM slot. Both majority parties, and much of Italy is now in an uproar. At least as of this morning, there was no indication they’d accept this pro-Euro PM. This ignited international currencies fears and renewed rumors of an Italian instant replay of the Brexit, aka, the Italexit. Hence, the latest Italian contagion. (Yawn.) But everybody still panicked.

Today found European stock investors stampeding toward the exits. Their American counterparts, already terrified by the recent action in the oil patch, are doing likewise Tuesday, happily dumping oil stocks and absolutely panicking out of bank stocks. Or anything they can sell.

Simultaneously, European and U.S. investors are piling into government bonds, causing interest rates, which had been soaring, to suddenly plummet and banks stocks to rapidly tank. And the Fed is going to hit us with another interest rate hike in June? What’s the point?

Both the above developments, at least short term, are horrendous for stock investors. They’re great for bond investors. And as for you and me? At least short term, they could be great for us. At least if you ignore what happened in our portfolios today.

Gasoline? Prices at the pump are likely to recoil from the $3.00+ Memorial Day rate they’d been hitting just last week. (Probably well over $4 in La-La Land.)

Meanwhile, if those interest rate drops can hold, courtesy of the current, ongoing Italian contagion, they might get the mortgage and re-fi action going again, along with new home construction.

But who knows? In this age of computerization, stocks trade on headlines, not value. Bonds go up and down depending on the rumor mill. And the computers tend to panic at the tiniest rumor, which is certainly what we’re seeing today.

In truth, oil prices have gotten ridiculously ahead of themselves. They can come down further from where they are now, and it still won’t kill off the industry. Not by a long shot. Gimme a break.

Similarly, that potential Italian contagion. For better or worse, Italy has essentially remained a political basket case since the end of the Second World War. They seem to average a new government every 6 to 18 months. That’s no way to run a country and their economy shows it. So what else is new?

One thing seemed different this time, however. So frustrated were Italian voters in the latest election earlier this year, that they effectively dumped the entire Deep State, the most fervently pro-Euro elites in that country. This shocked the Ruling Class to its core. After all, the people are revolting anyway.

But now, we are seeing the equivalent of Italian Deplorables. The fear and confusion is palpable in Italy. It’s as if the populist coalition that won the most recent elections were all donning red MIGA (Make Italy Great Again) baseball caps. Total freakout by the elites. Why? There is always an Italian contagion. Maybe someday, Europeans will catch that bug. But we’re not betting on that to happen today.

All this electoral pandemonium has flipped international investors out. Today, they all ended up in the crazy zone. It’s as if everyone was watching the same B-grade horror film, where the panicky guy who’s been bugging you all during the movie races around frantically, screaming, “WE’RE ALL GONNA DIE!”

Well, we all ARE gonna die. But for most of us, it probably won’t be tomorrow, so let’s not go nuts like the computers. At least not yet.

As we finish today’s column, averages completed at least a partial retracement of their earlier swan dive Tuesday. The Dow ended the day off 391.64 points (-1.58 percent). The S&P 500 was off 31.47 (-1.16 percent). And the tech-laden NASDAQ was off a less horrific 37.26 (-0.50 percent).

Read also: Small investors battle bungee-jumping traders in dizzying Wall Street donnybrook

So, after that oil price dive and the latest Italian contagion, what’s a small investor to do?

Yes, our portfolio took a nasty hit like everyone else’s. But we’ve seen a lot worse. Today’s double panic was way overdone and typical of a sullen post-beach weekend, first-day-back-at-work attitude on the part of traders and investors.

Things may get worse before they get better. Oil will continue to bungee jump, and the current Italian contagion very likely will get replaced by another. But today was so silly we did some buying. Since banks were getting killed (lower interest rates, allegedly less profits), we upsized our positions in JP Morgan Chase (symbol: JPM) and Regions Financial (RF). While we’ve been downsizing our actual stock holdings in favor of broader-based ETFs, we’ve kept a few. And this international-regional bank pair of holdings are joining our small individual stock “buy and hold” list.

We also slightly added to our Schwab ETFs, primarily the large-cap growth ETF (SCHG) and the large-cap value ETF (SCHV). We also established a token position in Schwab’s mostly 10-year government bond ETF (SCHR), just in case the bond-buying panic we saw today continues to get out of hand.

Aside from that, we’re holding the rest of our stocks, at least for now. But in this environment, who knows? We did a lot of the “sell in May” thing, but not the entire portfolio.

This tactic doesn’t feel very good right now. But we’re trying to take a bit of a longer term outlook, as things do tend to normalize eventually. Provided you don’t panic (like the high-speed traders) every time a scare headline pops up. That’s the best way I know to end up in an early grave.


Terry Ponick

Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Senior Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17