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It's unlikely the euro will survive what I'm calling the Spailout… meaning, the bailout of Spain, and the contagion to Italy, etc.
Believe me, you're going to be seeing and hearing this non-stop in the media for quite some time. And fear will be running rampant as a result.
I'm going to explain everything about the Spanish situation in a moment – probably more than most people care to know – but first, let me share something with you that's worth your attention.
You don't have to repeat the fears and frustrations of this financial crisis, let alone see a huge drop in profits.
So take a deep breath and think about these five things you can do right now that will help you protect your money, build your future despite this madness and sleep soundly at night.
- Take advantage of stimulus-induced rallies to sell into strength and rebalance your portfolio. Many people think you want to sell your losers and let your winners run but that's not quite right. What you actually want to do is sell as the markets are rising (and demand is strong) and use the proceeds to shore up underweighted segments of your portfolio. Over time, this can dramatically improve your returns because it forces you to harvest winners and constantly capitalize upside potential.
- Raise cash using your trailing stops to prune those holdings that do roll over – you are running them, right!! This is closely related to Item #1. Here, too, many investors make a classic mistake. They assume trailing stops are used only to protect against losses. What they fail to realize is that trailing stops are one of the most effective means available to capture gains. To use them properly, you want to ratchet them up constantly as stocks (or any investment, really) runs higher. You never reduce them. So, for example, if you buy a stock at $5 and it runs to $12.70 as NetQin (NYSE: NQ) recently did for my Strike Force readers, a 25% stop means you'd sell out at $9.52 and realize a healthy 90.50% gain…with no emotional turmoil, no hesitation and no fear of letting a healthy winner turn into a loser as so many investors do.
- Confine new money to "glocal" choices put on sale. Focus on yield because it helps solidify your portfolio and hold down risk. Fragile markets and an unsettled future mean that quality matters more than ever before. I prefer big multinationals with fortress-like balance sheets, growing earnings and solid dividends right now because they're more stable than the broader markets and, indeed, entire countries at the moment. The key is not so much the diversification of risk in the classic sense, but the concentration of potential. I'd rather bet on savvy business leaders than feckless politicians any day.
- Include specialized investments like the Rydex Inverse S&P 500 Strategy Fund (RYURX), the Rydex Inverse Government Long Bond Strategy (RYJUX) and gold in whatever form you prefer. The takeoff may not be immediate, but that's not the point. Hedges work over time, not just in the immediate moment. What you are doing is adding holdings like these to stabilize your upside and give you the chance to stay invested when times are tough.
- Try not to overthink this mess no matter how ugly the headlines get. Believe it or not, the markets have seen far worse over the years, including the panic and depression of 1869-1873, the economic collapse of 1893, and, of course, the rout in 1929 that lead to the Great Depression. All proved to be tremendous buying opportunities for those who had the courage to go on the offensive and the knowledge to invest selectively.
Now let me give you the skinny on the Spailout and why it will destroy the euro as we know it.
The Problem with the Spailout
First off, last weekend's 100 billion euro ($126 billion) Spanish bailout has staved off the inevitable for now.
What most people don't realize, though, is that it actually spells disaster for the euro — there simply isn't enough liquidity in the system and never has been. 100 billion euros is chump change.
A trillion euros is more like it. Probably more, to be quite candid.
Let me lay out the math that European politicians, whose skill set apparently consists of saying "present," rather than developing real solutions, can't be bothered to do.
According to the latest data, the European Stability Mechanism (ESM) and the European Financial Stability Fund (EFSF) have a combined lending capacity of 700 billion euros. If Spain requests the full 100 billion euros it approved last Saturday, this leaves 386.7 billion euros in excess capacity. The EFSF has already committed 213.3 billion euros.(700b euros minus 213.3b euros minus 100b euros equals 386.7 billion euros).
The problem is that Spain and Italy have combined total needs of 620 billion euros in the next two years alone.
If you're doing this math in your head, you'll quickly realize that's 233 billion euros more than the total bailout mechanisms now in existence.
Oops.
Call me crazy, but under the circumstances I don't understand how European leaders can pursue the same course of sorry-assed lending in Spain that they did in Greece and expect different results. It's simply irrational.
Don't get me wrong, I understand why they are trying to pull the wool over everyone's eyes. But in reality, who's kidding who?!
The markets know the politicos can do nothing to stem the tide of money flowing out of Spain any more than they could stop money from leaving Ireland, Italy and Greece.
The only practical consideration is preventing an all-out bank run through the front door – never mind that it's already well underway out the back door.
Frankly, I think they've failed on both counts. Deposits in German banks are up 4.4% year over year to 2.17 trillion euros as of April 30th, while deposits in Greece, Ireland and Spain fell 6.5% over the same time frame.
Swiss bank sight deposits have reached five-month highs of 252 billion francs as of June 1, according to the Swiss National Bank. CNBC is reporting that up to 800 million euros ($1 billion) a day is being pulled out of Greek banks alone. Data from Spanish banks related to withdrawals is being closely guarded, but I can't imagine it's that much different.
No wonder the world's traders recognize the Spailout for what it is – a colossal mistake.
I'd tell you what I think, but the legendary Jim Rogers put it so succinctly I don't believe I can do any better. Speaking in an interview on CNBC recently, Rogers noted that the Spanish bailout is "the most insane thing I've ever heard."
I agree.
Financial systems function because of an incentive to succeed that by its very definition includes the possibility of failure. You can't have one without the other.
Rogers noted this as well, saying that this is "the way the system is supposed to work – when you fail you fail – competent people come in and take over the assets."
As he put it to me a few years ago during a conversation we had in Singapore just prior to our bailout here (and I am paraphrasing), "history is littered with the bones of failed financial institutions. Why should this be any different?"
The problem in Spain is the same as it was in Greece. They're effectively handing over the reins and 100 billion euros to the same incompetent, incapable people who helped caused this mess in the first place.
A Euro-Comedy of Errors
Want proof? Look no further than how the 100 billion euros in "aid" is supposed to be disbursed.
The bailout cash is supposed to be put into the Fund for Orderly Bank Restructuring (who comes up with these names??!!) which has been created specifically to fund insolvent banks. Apparently the word insolvent doesn't bother them one bit.
But that's not the half of it.
This aid – and it's a stretch to call it that without turning into a drooling idiot – potentially adds another 10% to Spain's debt and takes it up to 80% at the end of this year. Factor in Spain's national and European debt and total debt to GDP exceeds 140%, according to Lance Roberts of Streettalk Live.
In other words, the Spailout just threw that nation into the ditch they've dug for themselves.
I can only shake my head and recall the Australian comedic duo of Clark and Dawes who impeccably summed this up, asking, "How can broke economies lend money to other broke economies who haven't got any money because they can't pay back the money that the broke economy loaned to the other broke economy and shouldn't have lent it to them in the first place because the broke economy can't pay it back?"
I believe that the EU ministers have acted, once again, in knee-jerk fashion and without a complete understanding of the facts. Or worse — in deliberate omission of the facts.
Nobody knows how much money will ultimately be required. We won't even have an inkling until June 21st. That's when Roland Berger and Oliver Wyman are scheduled to turn in the results of their Spanish bank stress-test audits.
There is hope for a more complete picture, including audits of 14 of the largest Spanish financial institutions, but that data isn't going to be ready until the end of July…at the earliest.
In closing, I realize that what I've shared with you today may be scary…downright terrifying even. Do yourself a favor and take it with a grain of salt.
Despite that European politicians can't seem to understand the reality closing in on them like a gigantic anaconda, there are still companies busy building the future.
And those are the ones you want to buy no matter how bad it "gets."
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About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.
Sometime last month, 'Der Spiegel' ran a three part essay on the establishment of the Euro. Right from the beginning, blind eyes were deliberately turned toward the chicanery of certain countries, one in particular. Right from the beginning, it was baldly obvious that the countries of the southern tier of Europe had little or no grasp of anything remotely resembling fiscal discipline. It was 'a triumph of hope over experience' It was an ideological obsession to bring about something that simply could not, by the nature of things, be. It was a case of not knowing where to stop. The result is a possible denouement of leaving Europe far worse off than if the program of European unity had never been. A very serious possibility is that the very notion of the present governance of the European states could fall into disrepute and massive regime changes ensue, not necessarily for the better. I do not mean elections throwing one party out for another.
OK, this Euro collapse has been going on for a few years. What day will the fat lady sing, when do we stick a fork in it because it's done. This is the longest slowest collapse I've ever seen, however it is my first one. They have been on the edge a of a cliff for such a long time.
Three clichés. Do you have anything to say?
Germany did not want a stronger deutsche mark that would impair its exports compare to other european currencies, they came up with the euro as a solution instead of research, technology and quality, they chose the currency scam and now they are paying the price. Nothing is free.
I think there is just so much sh*t ( sorry for lack of a better term) hitting the fan, and flying out everywhere,that nobody has ever dealt with such, nobody knows how to, or wants to deal with telling mom and pop and the children that they are refugees again, just like after the last several European disasters, because greedy irresponsible financial institutions on 'both' sides of the Atlantic managed to find a way to over-ride their real exposure to risk through using dodgy, barely legal, shadowy derivatives, and by lobbying governments to remove well founded (through previous experience) laws like Glass-Steigel, to sell flam-flam mortgages to masses of investors etc. God what a mess they have made! And really there is no recourse except to let it all collapse sooner than later. But heads will roll then and those in power are not sure if one them is going to be their's. Hence throwing money at the whole stinking mess in hopes that it will go away. I hardly know a thing about the markets..this I admit freely, but I will say here that I don't think there is a man or woman, or group men and women out there who can, or knows how to subdue this monster Short of letting it collapse fully and completely as soon as possible there is no other option. I think the term is 'cutting our losses', however profoundly destructive it will be. I am tired of the drama. I want reality now. However bloody horrible it is at least its the facts.
TODAY'S FUNNY MARKETS & TRAILING STOPS CAN MAKE FOR AN ODD COUPLE
Experience has taught me that trailing stops can be less effective in a volatile market, like we had in May, 2010 ("Flash Crash") and with unpredictable, volatile stocks like Apple (Sept-Oct 2011). I used trailing stops with Apple in both instances and was stopped-out.
It was nerve wracking because my last Apple stop was at $ 375 and the market dipped down to $374 for just ONE day (one trade??), then came back up to $376. After that, it was up, up, up. Even Fox New's Bill O'Reilly complained that stop-losses did not work during the first "flash crash" because many of his stop orders got triggered on that day too. His question: Why use them if the market suddenly crashes and takes a bunch of them out in one day?? I say its one more example of market risk in today's funny markets. Another lesson: all trades are a probability. Fact is, you never know what the market is capable of.
In practice, it can be difficult to forecast what the so-called "take-out" zone will be for any given stock in a given market, assuming you move the stop loss up with the stock to capture maximum gains. You wonder if the flash traders know something you don't about where different individual stock positions are and target the average stop loss with some kind of sinister algorithum. Nevertheless, with a cost basis of $10/share on Apple (NOT IPO), it is just a matter of making less money, alot less.
Experience has taught me that trailing stops can be less effective in a volatile market, like we had in May, 2010 ("Flash Crash") and with unpredictable, volatile stocks like Apple (Sept-Oct 2011). I used trailing stops with Apple in both instances and was stopped-out.
It was nerve wracking because my last Apple stop was at $ 375 and the market dipped down to $374 for just ONE day (one trade??), then came back up to $376. After that, it was up, up, up. Even Fox New's Bill O'Reilly complained that stop-losses did not work during the first "flash crash" because many of his stop orders got triggered on that day too. His question: Why use them if the market suddenly crashes and takes a bunch of them out in one day?? I say its one more example of market risk in today's funny markets. Another lesson: all trades are a probability. Fact is, you never know what the market is capable of.
In practice, it can be difficult to forecast what the so-called "take-out" zone will be for any given stock in a given market, assuming you move the stop loss up with the stock to capture maximum gains. You wonder if the flash traders know something you don't about where different individual stock positions are and target the average stop loss with some kind of sinister algorithum. Nevertheless, with a cost basis of $10/share on Apple (NOT IPO), it is just a matter of making less money, alot less.
When we talk about Europe we should remember that not all its 27 members use the overvalued Euro. Britain, Sweden, Romania, Poland, Latvia, Lithuania, Hungary, Denmark, Czech Republic, and Bulgaria all use their own currency. The remainder use the Euro and it is one of the reasons Europe is in a depression, but fuel is the overriding angel of death for Europe. Vat (iva) and fuel duty has destroyed growth, people cannot afford to go to work, and fuel cost alone is destroying everything including existing business and businesses. Europe is in a death spiral of tax and its taxpayers are being made to fund private banks and countries that are insolvent.
Not only do we have insolvent banks but we have also some insolvent Governments ran by Posh boy Gasbag rats who think their Gold plated education and wealthy parents will bail them out.
From my extensive knowledge of Rats, there is one thing certain; Rats always leave a sinking ship, it doesn’t matter if it’s a Bank or a Government.
Gordan finch
Itsfraud.com