U.S. Equity Futures; Greek Interim Gov't; Italian Uncertainty

U.S. equity futures advance on continued strong Q3 2011 corporate earnings reports (McDonalds beat earnings estimates as did Toll Brothers and Rockwell, while International Fragrances did not), as EU equity markets increased two percent in anticipation that Italy's PM will no longer govern. Just announced this morning, Greek PM George Papandreou named former ECB Vice President Lucas Papademos as prime minister of an interim government. This action, while tempered by the uncertainty in Italy's government, should help smooth global markets; presently the U.S. Dow is up 60p basis points while major EU equity indices have increased over 2%. Confidence among U.S. small companies rose in October for a second month, reflecting increasing optimism regarding the outlook for sales and the economy (per a private survey). The National Federation of Independent Business’s index climbed to 90.2 in October, the highest level since June, from September’s 88.9. The gauge averaged 88.6 in the 18-month recession that ended in June 2009. 

Globally, the focus Italy's Parliament voting today on a 2010 budget measure (a look back review process -- usually a fairly routine matter) to force Italian PM Berlusconi to demonstrate he retains 316 votes to indicate a majority of Parliament members support him; a consequence could be that today's result evolves to a vote of no-confidence, in which case the PM could resign or be replaced. Interestingly, Italy's process looks very similar to last week and the continuing Parliamentary action in Greece.

First, consider the EU process to restore fiscal solvency in Greece, Italy, Ireland, Spain, and Portugal; each country is in a different stage of the process, with the desired result of reducing public expenditures (which reduces long term debt - the goal is to spend less than the taxes and revenues collected) and creating an economic growth environment; in Italy's case, the long term challenge is creating economic growth (tax and social costs reform included) while managing very different population demographics compared to a half generation ago. All of the preceding countries were part of the eurozone's debt crisis that led to bond yields surging in July 2011; this then prompted most all EU countries and the European Central Bank to demand more austerity measures from these countries - with a demand to balance their budgets and try to increase growth with fundamental structural reforms. In response, most all countries have submitted reform plans to EU leadership and are now in the plan implementation stage. The IMF now is reviewing these countries' economic Plans on an ongoing basis, as their sovereign bond interest rate levels run at about 7%.

Post July 2011, the ECB began buying these countries' bonds; in Italy's case in August and after the PM announced measures to eliminate the budget deficit in 2013; and, Italy presented a 45.5 billion-euro plan that included higher taxes and spending cuts ("the Plan"); however, Italy's governmental discourse delayed the Plan's passage and led to reduced investor confidence in Italy’s government to implement the Plan; this remained the state of affairs in September and October. Now, in November, Italy's PM submitted a timeline to EU leaders regarding the implementation of parts of the Plan. The PM will also submit the Plan to a confidence vote in Italy's Parliament -- supposedly next week.

In Italy, as we saw in Greece, should the PM's government fail, the opposition party leader would consult with other political parties in an intended collaborative manner, so to form a new majority administration; a public vote could also be proposed for a future date. Continuing to implement an economic plan would be a necessity, with EU leadership (ECB and IMF included) monitoring progress. It should also be recognized that the current Italian PM's popularity is at a record low, and his coalition trailed the main opposition alliance by 10 percentage points in a poll by IPR Marketing conducted on October 28, 2011 (per Bloomberg News).

Timothy Speiss is the Partner-in-Charge of EisnerAmper's Personal Wealth Advisors Group and Vice President of EisnerAmper Wealth Planning LLC. He chairs our Asia Practice and is a member of the firm’s community service group, EisnerAmper Cares.

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