Position: Short Spain via the etf EWP
German Factory Orders rocketed to the upside on an annual basis by 19.6% in January, yet it’s worth noting that the comparison is on -36.8% in January ’09, which marked the bottom in manufacturing orders (see chart below). On a 2-year monthly average the data shows an accelerating improvement from December (-10.45%) to January (-8.6%) versus November (-11.05%). The improving trend in 2009 was aided by government stimulus measures, including the country’s successful cash-for-clunkers program issued from January to September. Comparisons will get more difficult as we move to the back half of the year.
Certainly on an annual compare the rise is less impressive and is much more in line with our longer term thesis that Germany’s heavy industrial and manufacturing exporting base will benefit from increased global demand this year, albeit as a slow churn higher.
The sequential move in orders of +4.3% versus a contraction of 1.6% in December is significant. Export orders rose 1.9% on the previous month with a 6% increase in demand coming from the Eurozone countries. Domestically, orders rose 7.1%.
At times over the last two years we’ve had a long position in Germany via the etf EWG in our model portfolio. Currently our only position in Europe is short Spain (for a TRADE) to take advantage of a price action move to the upside in the etf EWP; however, our continued bearish outlook on the country due to such negative catalysts as massive unemployment, public and private debt leverage, and a failed housing market, remains.
The German economy is one that we continue to like because of its sober fiscal policy. Chancellor Merkel reaffirmed her conservative stance versus the debt issues associated with Greece today in a meeting with Greek PM George Papandreou. Although we wouldn’t rule out intermediate-term assistance from the European community to fund Greece’s debt problems, the immediate term “clean-up-your-own-house” stance from Merkel sets a positive tone for the region.
The three times oversubscribed 5 Billion EUR Greek bond issuance yesterday—albeit with at a heavy premium rate of 6.25%--is an initial positive step, but we believe significant risks still remain, which we’ll continue to monitor real-time.
Matthew Hedrick
Analyst
