The PIIGS Are Getting Sloppier... Here's How to Clean Up

by Karim Rahemtulla

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

comments powered by Disqus