The Crisis In Italy Is Hurting Penny Stocks

| November 10, 2011 | 0 Comments

Italy and Penny StocksRaise your hand if you predicted a sharp penny stock selloff based on a crisis in Italy.  As unlikely as it sounds, that’s exactly what’s going on right now.

Here’s the deal…

Italy has serious debt problems.

We’ve heard all about the debt problems in Greece, Portugal, Ireland, and Spain.  But Italy’s $2.6 trillion in debt is more than all four country’s debt combined.

And Italy isn’t some fringe Eurozone country.  Southern Europe’s most important nation, Italy has the third largest bond market in the world… and it’s the eighth largest economy.

Needless to say, an Italian debt default would be a huge crisis.  It could threaten to throw the entire global economy into severe recession… or even a depression.

So why’s Italy suddenly in the spotlight?

Basically, it’s all about bond yields.

You see, Italy’s 10-year government bonds breached the 7% yield level this week.  That’s the highest it’s been since the EU was created.

And more importantly, at that yield, Italy can’t afford to pay out interest payments.

The yield’s record climb is due to several factors.

First off, the upcoming exit of Prime Minister Berlusconi leaves the country’s leadership as a big question mark.  What’s more, investors aren’t convinced the European Central Bank can act decisively enough to bail out Italy… if that’s even possible with as much debt as they have.

Finally, Europe appears to be heading into a recession.  Clearly, it’s the worst possible time for economic growth to be stagnating, or worse, reversing.

So what’s this have to do with penny stocks?

Well, if you watched the market yesterday, you saw what the fears of an Italian crisis can do to the financial markets.

The Dow Jones Industrial Average plunged nearly 400 points or 3.2%.  And the Russell 2000, a good indicator of the penny stock market, dropped a daunting 4.8%.

In other words, if investors are worried about risk, they’re going to sell their stock holdings.  And, as I said before, penny stocks are often the first to go.

Still, I’m not running for the hills just yet…

Italy has time to fix their problems.  It won’t be easy, but there are ways to ease the country out of crisis mode… particularly if European leaders are willing to take bold steps.

In the meantime, the selloff in penny stocks could present us with a great opportunity to buy good companies on the cheap.  Don’t be afraid to load up on your favorites if they drop to bargain basement levels.

Yours in profit,

Gordon Lewis

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