Banco Espirito Santo (BES)

I came across this article in the NYT. It is the best discussion I've found about what is happening with BES and its potential implications.

As you might know by now, this bank falls within a holding company with a very convoluted structure. This has given the markets significant worries, as we have witnessed earlier this week.

On a personal note, a family-owned conglomerate with a very complex structure gives me reasons for concern.

I think it is too early to dismiss what is happening with BES as a non-event. No one can for sure fathom the potential impact of what has happened, as the holding company structure has not been divulged fully. I agree with C. Icahn and say that here you want to be cautious if you are in stocks.

I'm keeping a very close eye on the situation, and I have closed some of the more speculative stocks I owned. Core stocks I'm still holding (e.g. AAPL, MSFT, INTC) as well as gold stocks (RGLD and GDX).

I would also suggest you keep a very close eye on the U.S. 10-year yield. The bond market has been spot-on pricing these sort of events.

I had a quick chat this afternoon with an interest rate trader at one of the Tier 1 Wall St. banks. His view is that by the middle of next year, if not before, the Fed might be forced to act (i.e. move rates up). All these traders tend to be on the same side of the market. So this means to me that the market is expecting yields to go higher.

If instead we see 10-year yields aggressively moving lower (i.e. making new lows for the year) I will take this as a warning sign and reduce my market exposure accordingly.