Does Italy matter?

Does Italy matter? 

It does and will, for one day, or every day it pulls a rabbit from its hat .

Last week when the Italian PM signaled his intention to resign, overseas markets took the uncertainty rather negatively. Next day portfolio spreadsheets, linked to real time data feed on our desktops, mostly showed red ink, unless someone had a net short exposure.

But that is only short term, and frankly, can anyone who deals with stocks trade this market and hope to make a return?

Not really unless we are managing a macro hedge fund, and even if that was the case it still is probably too risky – i.e. hard to quantify and hedge the price dislocations.

And there were and will be price dislocations, significant ones— in the short term. Especially for those stocks with a higher exposure to Europe such as Makita, Panasonic, Sysmex and a score of others.

Reuters has a Top 20 Europe sensitive list (see below).

Bottom line is how to take advantage of a list like this in a market we are in without knowing the long term impact of the current events.

By long term impact I mean impact on fundamentals such as sales (a function of demand in end market, and currency), and profits (a function of currency exposure, local production and labor situation). And don’t forget the potential disruption from changes in tax regimes or even trade flows.

The biggest risk in a stock portfolio is its investments get under distress. Luckily in a portfolio of stocks this is less of a probability unless large amounts of debt or other liabilities are involved.

So maybe, then, Italy will provide an opportunity for valuations.

There was a nice piece on Insider on what to do in a market like this. Here is the link

Also, Breakingviews has published a timely calculator on Italy’s debt spiral. Take a look.

Have a good day.

Erol

Top 20 Europe sensitive Japanese stocks (released by Reuters Sept 12,2011)

<6277.T> HOSOKAWA MICRON
<6586.T> MAKITA CORP
<5202.T> NIP SHEET GLASS
<6789.T> ROLAND DG
<6586.T> MAKITA CORP
<6581.T> HITACHI KOKI
<7944.OS> ROLAND CORP
<7751.T> CANON INC
<6817.T> SUMIDA
<7873.OS> ARRK CORP
<6444.T> SANDEN CORP
<6869.T> SYSMEX
<6737.T> EIZO NANAO
<6816.T> ALPINE ELEC INC
<4902.T> KONICA MINOLTA H
<7999.T> MUTOH HOLDINGS
<6448.T> BROTHER INDS
<7718.T> STAR MICRONICS
<6472.T> NTN CORP
<6349.T> KOMORI CORP

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