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Takeaway: Spain’s risk profile continues to set up to the downside. Shorting tactically.

Positions in Europe: Short Spain (EWP); Long German Bunds (BUNL); Short EUR/USD (FXE)

Today Keith shorted Spain via the etf EWP in the Hedgeye Virtual Portfolio. The etf is immediate term TRADE overbought and nearing our long-term TAIL resistance line of $27.79 (see chart below).

Idea Alert: Shorting EWP - bb. ewp

Our thesis on Spain hasn’t changed materially in recent months, including that the market has not fully priced in all the downside risks in the broader economy.

As a reminder, some of these risks and signals include:

  • Bombed out PMI Manufacturing number, 42 in August
  • Housing and Property values that have another 30% to fall
  • Mortgages on Houses data at -25.2% in JUNE Y/Y
  • Further credit ratings downgrades: Moody’s is expected to downgrade the sovereign to junk this month
  • Rising debt levels (68% of GDP in 2011) as the future bank credit line, funneled through the FROB, adds to the debt
  • Unemployment Rate at 24.6% and over 50% for youths
  • The inability of PM Rajoy to reduce the country’s 8.9% deficit (as % of GDP)
  • Bombed out Retail Sales: -6.9% in JULY Y/Y
  • GDP in Contraction: -1.3% in Q2 Y/Y (vs an initial estimate of -1.3%) or -0.4% Q/Q
  • Sticky stagflation: CPI at 2.2% in JULY Y/Y
  • GDP Fudging: 2010 GDP restated to -0.3% vs -0.1% initial; 2011 restated to +0.4% vs +0.7% initial
  • The spread between the Spanish 10YR yield and 2YR is at all-time wides of 350bps, as Draghi talks down the lower end of the curve via reengagement of a bond purchasing program
  • The IBEX 35 is down -16% since a ytd top in early February

Idea Alert: Shorting EWP - bb. gdp

Idea Alert: Shorting EWP - bb. spread

Matthew Hedrick

Senior Analyst