by Charles Sizemore | December 10, 2012 12:32 pm
Part of me really missed Silvio Berlusconi. There was something naturally endearing about the guy.
Perhaps it was his ability to charm women 50 years his junior or his complete disregard for the conflicts of interest involved with being your country’s national leader and one of its richest men and the owner of its most influential media group. Or maybe it was his willingness to change the laws of his country on a regular basis to protect himself from criminal prosecution or the fact that he ruled Italy — the third-most powerful country in continental Europe — like a mafia don.
Through it all, naughty ol’ Silvio seemed to prove that, with a few winks and nods, a ton of money and a total lack of shame or scruples, a guy really could have everything he wanted in life.
On a serious note, I was not happy to see Mr. Berlusconi reappear on the political stage. It is a potential disaster for Italy, the eurozone and investors around the world.
Berlusconi’s party withdrew its support for Italy’s technocratic prime minister Mario Monti — the one political figure in Italy that both the international bond market and the other leaders of Europe took seriously — prompting Monti to turn in his resignation over the weekend.
Not surprisingly, Italian stocks sold off Monday morning — the iShares MSCI Italy Index (NYSE:EWI) had lost more than 3% before recovering slightly by midday — the euro fell and Italian bond yields shot up. And across the Mediterranean, Spanish stocks fell, and Spanish bond yields rose.
The market is not happy about Silvio Berlusconi’s return, either.
The fragile peace we’ve had for much of the past year has come on a belief that we finally had an adult running Italy. Bond yields had been steadily dropping as a sign of confidence in Mario Monti and his austerity reforms. An Italy without Monti is the same dysfunctional Italy that ran up debts of 120% of GDP while showing no real GDP growth in over a decade … proverbially fiddling while Rome burned.
Berlusconi will not win the upcoming election. His party is a tattered mess, and most Italians are sick of the man. Plus, Mario Monti might yet stage a comeback, either as the head of a centrist movement or as a finance minister in a center-left government headed by Pier Luigi Bersani.
But Berlusconi’s presence is enough of a distraction to have the markets worried. My fear is that he rattles the bond market out of its complacency and creates another self-reinforcing cycle of loss of confidence leading to higher yields and vice versa.
It’s too early for me to recommend dumping European stocks just yet. Thus far, the market seems to have confidence in ECB President Mario Draghi’s ability to keep the entire dog and pony show together with creative monetary policy, and Europe’s leaders are slowly muddling through to a political solution to the debt crisis.
But given the ability of investor sentiment to turn on a dime, I would recommend tightening stop-losses. Or at least start keeping a closer eye on your European stock holdings.
Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Sign up for a FREE copy of his new special report: “Top 3 ETFs for Dividend-Hungry Investors.”
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