My Poor Italy

Why This Stock Market Will Fall Like a RockThis morning came the news that Italy, a country very close to my heart (just look at my last name) and the third-biggest economy in the eurozone, is back in recession.

And Germany, the biggest economy in Europe, saw factory orders in June drop by the most since 2011.

While the financial media has taken the focus off the eurozone over the past couple of years, I have continued to tell my readers about how bad conditions are there. I have the pleasure to travel to the eurozone several times a year. I can tell you first-hand how people there are suffering. Outside of Germany and the smaller, rich countries, jobs in the eurozone are extremely hard to find and wages are very soft.

The European Central Bank’s move to bringing its overnight deposit rate to negative is obviously not having its desired effect of getting banks there to lend out more money. Many eurozone banks are in serious financial trouble. You can’t force a bank to lend money to its customers if the bank is concerned about its own financial health.

With about half of the S&P 500 companies deriving revenue from Europe, it is no wonder American corporations are having trouble increasing revenue. Last week, the eurozone introduced wide-ranging sanctions against Russia because of the Ukraine situation. Russia is Germany’s largest trading partner in Europe—obviously, eurozone companies will feel the pain of the sanctions imposed on Russia.

In the U.S., we were already dealing with an overpriced stock market—a market characterized by heaving corporate insider selling, too much bullishness among stock advisors, the VIX Index saying investors have no fear about the stock market falling, companies buying back their stock (often with borrowed money) to prop up their per-share earnings, investors borrowing money at a record level to buy stocks, the Federal Reserve putting the brakes on printing money, and higher interest rates knocking at the door.

Add to the above all the geopolitical issues facing the world and eurozone countries falling back into recession—it is no wonder the Dow Jones Industrial Average has declined 722.09, or 4.2%, over the past 13 trading days.

I had warned my readers that when the sell-off did come, it would be steep. How many times did I write, “The higher the stock market goes, the bigger the fall will be” in these pages? Hopefully my readers were heeding my advice and were out of stocks before this carnage started.

Too many market players I talk to are of the opinion that a buying opportunity in stocks is getting close. I continue to think the opposite: this stock market is still severely overpriced and there is a lot more room on the downside to go.