Around this time last year I warned you that the Eurozone debt crisis would trample the Italian economy and take carmaker Fiat S.p.A. (PINK: FIATY) down with it.
To profit from this debacle, I told you to short Fiat. Since then, the stock has tumbled 76%, from $19 a share to yesterday's (Wednesday's) closing price of $4.66.
Fiat is a perfect example of how an unstable home market - like Italy - will kill a struggling company's stock. Fiat is Italy's largest private sector employer, and the past year's market performance mirrors the weakness unleashed by the European debt crisis.
Sadly, Fiat won't be the only company whose shares will plunge.
TheEuropean debt crisis has grown from a problem on the edge of Europe to a problem inside the region's core. You only have to look at the series of bank stress tests that Europe has rolled out to see that things are getting worse, not better.
In fact, the European Central Bank (ECB) announced yesterday that it would provide $638 billion (489 billion euros) in three-year loans to more than 500 banks in the Eurozone. More than a dozen Italian banks borrowed $143.52 billion (116 billion euros).
But the solution is only short term, and the region's grim long-term outlook hasn't changed. We're heading toward a point of maximum pessimism - one I think we'll reach sooner rather than later.
So, it's time to thank the Eurozone, Italy, and Fiat S.p.A. for a great short trade and close it out.While the stock could go all the way to $0, the meat of the move is over, and we want to take profits before a major short-covering event gives the share price a temporary boost.
Fiat S.p.A.: Stung by the European Debt Crisis
The European Central Bank forecasts Eurozone growth will slow to a near standstill next year, with gross domestic product (GDP) only expanding 0.3%. The ECB said area-wide inflation will reach 2.7% in 2011.
This slow-growth, higher-priced environment won't bode well for the region's automakers, which are already feeling the effects.
Automobile registrations in Europe in November dropped 3% to 1.07 million vehicles from 1.10 million a year earlier. That's the biggest decline since June, according to the Brussels-based European Automobile Manufacturers Association. The Italian auto sales market led the region's declines, slipping 9.2%. France was close behind at 7.7%.
Fiat's U.S. arm, Chrysler Group LLC, has performed better than its Italian counterpart, but not enough to carry the company. Chrysler's U.S. sales jumped 45% in November.
Fiat has talked about a Chrysler initial public offering (IPO), but has none planned. Meanwhile, the European debt crisis weighs on the potential strength the company could leverage from the U.S. market.
I would not be surprised if Fiat ends up filing bankruptcy in the medium term.
It could save itself and decide to cut Italian production and seek more profitable manufacturing locations around the world. In fact, Fiat and Chrysler said yesterday that they would focus more on international growth with the opening of parts distribution centers in Shanghai and Dubai.
Fiat Chief Executive Officer Sergio Marchionne said Dec. 14 the European debt crisis is too big to plan for, but the company was looking for help outside of Italy. He said the 2012 earnings forecast will be revised in light of the crisis, but has not yet released those updates.
With so many local investors cutting their losses and looking elsewhere for profits, Fiat may have no choice but to join them in the mass exodus.
In fact, here's a real-life example I'll leave you with.
Occasionally I field calls from an old friend in Berlin looking to talk money. Recently he got in touch with me to discuss how to preserve capital. He is fed up with an investing world where his local currency, the euro, is becoming increasingly worthless.
This friend has a Ph.D in finance, and has spent his career auditing major European banks. He has spent years voicing his hatred for the U.S. dollar and all related investments.
But now, he's throwing in the towel. He's ready to invest in U.S. companies and wants to swap out his euros for U.S. exposure.
When a dyed-in-the-wool dollar bear is going against his own thesis, swapping his economic exposure due to fear, I think a bottom is arriving.
Fiat has slumped 76% since my recommendation to short the stock. It could go to $0, but it's better to take the profit now, before short-covering causes a short share-price rally.
When I told you to short Fiat last year, I paired it with a long holding in Ford Motor Co. (NYSE: F). If you still have Ford in your portfolio, keep it. Normally, I unwind both legs of a trade, but I think Ford will profit in the New Year.
I like how Ford has been paying down its debt, saving the company real costs down the road. Production costs will also get cheaper as U.S. steel manufacturing picks up next year.
(**) Special Note of Disclosure: Jack Barnes has no interest in Fiat S.p.A. (PINK: FIATY).
Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.
Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning on Mondays. In his BSH column last week, Barnes analyzed AeroVironment Inc. (Nasdaq: AVAV).
News and Related Story Links:
- Bloomberg:
Peugeot, Fiat Lead European Car-Sales Drop as Economy Stalls - Money Morning News Archive:
Previous "Buy, Sell or Hold" Features. - JackBarnes.com:
Confessions of a Macro Contrarian.
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