by John Nyaradi
As smoke fills a crowded theater, danger peaks when someone yells, "Fire!" Around the world, investors face major threats and the threat of a catastrophic financial fire continues to grow. Key elements to investing success are identifying and avoiding threats to your financial survival. Today three major threats face U.S. investors.
Threat #1: Greece is at a critical moment. The June 17 election is a game changer. Early reports on Sunday point to a dead heat between anti-austerity and pro Euro forces. Another deadlock or anti-austerity win makes Greece's future in the Euro more doubtful and points to more volatility and uncertainty.
Threat #2: Spain
Spain is a far greater threat to U.S. investors than Greece. They don't have the money to bailout Bankia, much less the 16 other banks coming behind it. The ECB has nixed its involvement and the IMF doesn't have enough money to do it either.
Spain is the eurozone's 4th largest economy and money is fleeing the country ($85 billion last month). Their version of FDIC is broke and bonds are spiking to the 7% "unsustainable".
Everyone thinks the European leaders will pull a rabbit out of their hat one more time. This appears unlikely as they don't have a Constitution, a Federal Reserve or a Congress. In the end, they're a band of individual nations that have littered their continent with dead bodies for years, and when push comes to shove, which it will, it will be every man for himself.
Germany doesn't want to pay the bill for problems in Spain, Italy, Greece, Ireland and Portugal.
Threat #3: Irrationality
Europe is quickly approaching a state of anarchy, and once real panic takes hold, there's nothing that policy makers can do to stop it. We saw that here after the Lehman crash and there's a high probability that we're heading for an international Lehman Event. In this arena, P/E, value investing, fair value, all of the things that usually work are irrelevant. Like in the crowded theater when someone yells "FIRE!," everyone gets trampled heading for the door when panic sets in.
Threat #4: Italy
Italy is truly the elephant in the room as it's the 7th largest economy in the world and too big to save and too big to fail. In recent days, its bond yields have been spiking towards the unsustainable 7%.
Investors are becoming increasingly concerned that the Italian government will also need a bailout. If the Spanish government needs a bailout after its banks have been offered a bailout, there would be virtually nothing left for Europe to offer aid to any other country that needed a bailout, and especially an economy as large as Italy's.
Italy, meanwhile, is facing a large 1.9 trillion euro public debt. This debt is likely to increase due to the fact that the austerity measures imposed by Italian Prime Minister Mario Monti are crippling Italy's growth and cutting back on Italians' consumption of goods. Currently, Italy has Europe's 2nd-highest debt-to-GDP ratio. Furthermore, the Italian government is having difficulty finding the public funds needed to enact measures to stimulate its economy, thereby increasing the chances that an Italian bailout will be needed in the future.
For investors wanting to position themselves near the exits, ETFs offer a good seat. U.S. Dollar (UUP) U.S. Treasuries (TLT) and Gold (GLD) are all easily accessible in personal and retirement accounts through these liquid and widely traded exchange traded funds.
Bottom line: A look at both technical indicators and fundamental conditions indicates that smoke is filling the room. In the crowded theater, as smoke wafts across the ceiling, this could be a good time to start edging towards the door. Moving towards cash, bonds and gold seems like a nice way to head in that direction. If smoke turns out to be a false alarm, there will be plenty of opportunity to reposition assets, eat popcorn and watch the next movie.
Disclosure: Wall Street Sector Selector has a long position in (TLT) actively trades a wide range of exchange traded funds and positions can change at any time.