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Positions in Europe: Short Spain (EWP); Short Italy (EWI); Short EUR-USD (FXE); Short UK (EWU)

 

Keith shorted Spain in the Hedgeye Virtual Portfolio on a rally in the etf EWP today. As a reminder, Spanish risk signals are flashing due to steep debt maturities in August and October (see chart below); mounting political pressure for early elections of Zapatero’s government (scheduled for March 2012); and ongoing concerns about the strength of its banking industry, including exposures to the PIIGS (note: EWP is highly levered to financials, composing 41% of the etf).

Shorting Spain, EWP - 1. H

To the latter point, Josh Steiner and Allison Kaptur of our Financials team have done excellent work quantifying the most exposed European banks to the PIIGS based on the results of the EBA’s EU Stress Test, which they’ve included in a recent piece titled “European Debt Crisis: Where the Bodies are Buried (the 14 Most Exposed EU Banks)”.  If you didn’t receive a copy, please email us at . In the report you’ll note that Spanish banks rank high in the categories of both total exposure to the PIIGS and exposure as a % of Core Tier 1 Capital.

Shorting Spain, EWP - 2. H REAL

Below is a chart of the Spanish equity index, IBEX 35, which is broken across both its immediate term TRADE (9,969) and intermediate term TREND  (10,426) lines. As a reminder, despite all “best efforts” of European leaders to come up with solutions to the regions's sovereign debt contagion, we think that if anything should come of the EU Summit meeting tomorrow, which plans to discuss a second bailout for Greece, it will at best be just another short-term band-aid to provide temporarily relief.

Spanish risks will by no means come off the table.

Shorting Spain, EWP - 2. H

Matthew Hedrick

Analyst