Position: Short Spain (EWP)
I have been getting a lot of questions/emails today about Spain (I wrote negatively about it in my Early Look note this morning). Hopefully the “speculator” fun-cops over in the left wings of Europe don’t come after me. I am but one man, with an innocent chart and mouths to feed.
When it comes to size and scope, at $1.6T in GDP Spain’s economy is approximately 4.7x larger than that of Greece ($338B in 2009). There are 46.7 million people in Spain versus 11.3 million in Greece. That’s a lot of people who are likely offended by being called a Spanish Piggy.
When it comes to balance sheet and deficit problems however, the financial data doesn’t lie; politicians trying to put lipstick on it do. At 11.4%, Spain’s deficit to GDP rivals that of the USA’s and over $654 billion in public debt is pushing up against a worrisome risk manager’s level of 44% of GDP.
Because I am focused on these mathematical realities doesn’t make them new. That said, I am also very respectful of the fact that the last time the obvious risks implied by Spanish leverage started to freak people out, stocks went a lot lower than where they are currently trading.
In the chart below, you can wrap your head around the risk/reward of being short Spain’s stock market. Since the most recent YTD low established on February 5th, 2010 on Spain’s IBEX 35 Index at 10,103, Spanish stocks ripped the shorts for an expedited +9.4% rally. We short sellers of piggies call that an entry point.
We are using our intermediate term TREND line of resistance at 11,385 (red line in the chart below) as our risk management line. You can also use that as your stop loss level if you think there is risk that this Spanish Piggy can fly higher. With a Global Bubble in Bailout Politics forming, anything can happen…