The PIIGS Are Getting Sloppier…
Here’s How to Clean Up
by Karim Rahemtulla, Emerging Markets Specialist
Tuesday, March 30, 2010: Issue #1227
Imagine this for a second…
Riddled with debt, the state of Kansas defaults on its debt obligations. But instead of the U.S. federal government stepping in with financial help and guarantees, the International Monetary Fund jumps in with an aid package.
It wouldn’t happen. Not in the United States.
But the Eurozone is different. The 16-nation block has tried its best to appear more than it actually is. Take last week, for example…
- Portugal’s sovereign debt was downgraded.
- Rioting in Athens due to austerity measures and a collapsing economy forced the Greeks to go hat in hand to their Eurozone masters. But when Europe balked, the IMF offered a bailout package to Greece.
The laughable factor here is that EU chiefs publicly criticized the IMF move, boldly saying that, “What happens in the EU stays in the EU.” Of course, this is far from the truth…
Euro Trash
Under the cover of a single currency, the Eurozone has tried to take on the appearance of homogeneity.
It has failed. The euro and the Maastricht Treaty are now naked for the world to see – and it’s not a pretty sight.
I highlighted the problems confronting the “PIIGS” (Portugal, Ireland, Italy, Greece and Spain) and the euro in this interview in February. And in these very pages, I wrote: “… tax revenue has collapsed, economic growth is stunted and the bills are due. With Greece’s sovereign debt already downgraded, the others [PIIGS] are in jeopardy, too.”
It seems ridiculous to think that there was talk not so long ago about the euro replacing the U.S. dollar as a reserve currency. In fact, some Middle Eastern countries were even indexing commodities to the euro.
Today, however, the silence about the euro’s future status is deafening. And the worst is yet to come…
How Far Does the Euro Need to Fall to Become Fair Value Again?
Greece is only the first domino to fall.
The other PIIGS are waiting in the wings to do the same. In fact, their problems are as bad… if not worse.
And now that the IMF has set a precedent by bailing out Greece, will it do the same for Portugal, Ireland, Italy and Spain, too? It might as well takeover the EU if that happens.
Of course, currencies with the stature of the euro rarely collapse overnight. But they can tumble in value significantly. And that’s just what I think will happen to the euro.
Since I first spoke about shorting the euro in December, it’s fallen by almost 20%. And it’s still overvalued.
On a purchasing power basis (what you can buy for $1 in the United States, versus what you can buy for $1 in the Eurozone), the euro needs to at least fall to parity with the dollar to become fairly valued again. That happened right after the euro was introduced – and it will happen again before the PIIGS debacle is over.
Two Ways to Play the Euro Downside
There are two ways to profit from the euro downside – one now and one later…
- The “Now” Play: The easiest way is to short the euro. My weapon of choice is to buy two-year put options on the CurrencyShares Euro Trust (NYSE: FXE) – an exchange-traded fund that mirrors the euro’s movement against the U.S. dollar.
- The “Later” Play: The second way to play the euro downside is to keep your powder dry until the euro reaches parity with the dollar. Then buy certain European companies that will benefit from a weak euro.
The top companies on this list are: Nestle, Unilever, Phillips, Volkswagen and Daimler. This is because they’re all huge exporters and will see their bottom lines inflate on the back of a weaker euro.
It might take some time for the euro to ultimately find its true value, but not being ready to act when it happens is almost as tragic as what is happening in Europe today.
Good investing,
Karim Rahemtulla
Related Investment U Articles:
- Why You Probably Don’t Want to Hold Euros in 2011
- How to Play the Collapse of the Euro
- What the Greek Bailout Means for the Eurozone
- Enough Dra(ch)ma: The Euro Will Thrive… When PIIGS Fly!
- Greek Tragedy is a Warning to Washington
8 Responses to “The PIIGS Are Getting Sloppier… Here’s How to Clean Up”
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Dubbed a "market maven" by CNBC, Karim Rahemtulla is one of the country's foremost specialists in options trading. As founder and editor of The Smart Cap Alert, he focuses his efforts on all aspects of options trading – LEAPS, put selling/covered calls and spreads. 
I am primarily interested in Oil and the industry as a whole…by-products in particular. Not a big investor, but smart enough to see the future in the life-line of our world. I am very curious as to the thinking of experts in this field, but am very cautious also. Will invest if convinced of a profit, not a “wait and see” proposition.
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The Euro’s problems are purely political. It was assumed a common currency would automatically install a common economy and no Euro zone economy policy is required. Thus the Euro zone became devided in hard working and vacation , the latter being Greece Italy, and Spain. A lot of technological know how was outsourced to Eastern Europe as well as jobs, but none to Southern Europe, except Spain. The next problem is : ten thousands polititicans 10 million officials all of them extremely well paid and none of them contributing a cent to GDP. What the Euro economy lacks is simply lean management. Rather it is an obese management too fat to response to challenges in time.
Dr H.D.Franke Germany
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rather than short the euro wouldn’t it be better, more cost-effective, to buy puts on fxe or calls on euo? d hutchins
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Dana,
You can definitely try those routes as well.
Thanks,
Investment U
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I have a question for Karim. I’ve been an Oxford Club member for a very long time, from annual subscription to Chairman’s Circle member, have met him in Denver and Belize. So,I know about LEAPS. The question is: how many newsletters has he promoted for LEAPS. Wasn’t “Dark Equities” a LEAPS program? if not, how was it different from the new one?
I have a second comment, one that probably doesn’t belong here, but assume it can be forwarded to the appropriate person. I’ve spoken with Agora writers on tours, know that everything in the infinite number of newsletter promotions is vetted by lawyers, etc. But, with regard to the promotion for the “codes” newsletter its too vague about what one is “buying”. Unless I’ve overlooked something it only describes a “unique options play”. I’d love to type a 3 letter code and make a gazillion dollars, but I’m not into buying a pig in a poke. Thus have passed on it.
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I agree, it’s hard to sort out the real stuff from the crap.
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To the author of this article:
I am a Spaniard and simply put I am fed up with being insulted in blogs written by Anglo-Americans and northern Europeans whose ignorance about Spain ( or Italy or Portugal to that matter) is only equaled by their inflated sense of racial superiority vis a vis Southern Europeans. So I have something to say to you and the likes of you who use to call us PIGS.
First, from the point of view of the average PIG it is not us but those TOXIC APES ( Anglo-Protestant Economies for those not in the know) the ones who are at the origin of the mess we are all in. Did Maddoff, Lehman Brothers, Northern Rock and the like happen in Madrid, Athens or Rome?
- Second, was it not the appalling level of greed, corruption, dismal risk assessment records and downright incompetence by regulators and operators alike in the City and Wall Street the main reason for the financial crisis? But of course, as a way of distracting everyone’s attention it is easier to blame it on the Greek civil servant. Thank God that the UK is not in the EURO, that would be real hell.
- Third, standing at -11,5% and 68%, the levels of budget and public debt in the UK ( not to mention in the US) are higher than, for instance, in Spain (11,2% and 53%). Besides, Belgium (96,7%), Germany( 73,2%), Austria (66,5%), France ( 77,6%), the Netherlands (60,9)and other Nordics have higher public debts than Spain. Are they PIGS, APES or another kind of species?
- As to comparing Italy or Spain with the likes of the Netherlands ( the Dutch that you are calling a heavyweight when compared with the PIGS) Are you nuts or is simply your anti- Mediterranean bashing making you blind?. Italy and Spain are the seventh and eight largest world economies. Spain is the sixth largest world investor ( the second is Latin America, the fourth is the US and the second is the UK according to 2008 OCDE statistics). Together they are almost 100 million consumers and both Italy and Spain have excellent multinationals which are simply first class ( ENI, Santander, BBVA, Telefónica, Zara, Iberdrola, Acciona, ACS, all the Milan- based small and medium sized exporting firms…). And you idiot are calling us PiGS?
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Sir,
When the author uses the term “PIIGS,” he is not referring to the four-legged animal. PIIGS is an acronym for: Portugal, Ireland, Italy, Greece and Spain.
Thank you,
Investment U
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