Money Morning Article of the Week
by Keith Fitz-Gerald, Chief Investment Strategist, Money Morning
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.
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). Click on graphic for larger image.
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.
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.”
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 Fitz-Gerald has been the Money Morning team Chief Investment Strategist since 2008. He’s a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don’t yet see or understand. In addition to being editor of the Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and the Strike Force service, which aims to get in, target gains, and get out clean. Learn more about Keith on our contributors page.
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