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).
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
Matthew Hedrick
Senior Analyst