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“In a capitalist society, all human relationships are voluntary.  Men are free to cooperate or not, to deal with one another or not, as their own individual judgements, convictions and interests dictate."

-          Ayn Rand

After the market close yesterday, Keith and I were chatting about the German government’s decision to prohibit short selling on certain financial institutions and European Union sovereign debt with credit default swaps.   Despite having a good friend Michael Blum who is German, who also happens to be our Chief Operating Officer, I actually know very little German.  That said, the one word I do know is apropos for the decision yesterday by the German government . . . Doppelgänger.

For those of you who don’t know, courtesy of our buds at Wikipedia, the definition of Doppelgänger is as follows:

“In the vernacular, the word "doppelgänger" has come to refer (as in German) to any double or look-alike of a person. The word is also used to describe the sensation of having glimpsed at oneself in peripheral vision, in a position where there is no chance that it could have been a reflection. They are generally regarded as harbingers of bad luck.”

Obviously Keith and I are stock market operators, so we take this attack on free markets implemented by the German government particularly personal.  While trust in governments is at generational lows (we have to look no further than the victory of fringe candidate Rand Paul in Kentucky last night to verify that),  one would have hoped that governments such as Germany’s, who historically have been great advocates of free markets, would simply do the right thing, rather than institute a “harbinger of bad luck.”

Not surprisingly, Europe is selling off hard this morning with most markets down between - 2.5 and -3% on the back of this German policy.  I wonder what vision the Doppelgänger Capitalists see in the mirror this morning?  While blaming short sellers, speculators, stock market operators, and American banks is convenient, it is not the truth.  In fact, fundamentals don’t lie, regulators and governments do.  The issues in Europe can be blamed solely on  government officials, or as we call them, Fiat Fools, who piled debt upon on debt.

In the attached chart, we have highlighted the performance of the XLF, the S&P financial sector ETF, from the date of the SEC’s ban on short selling financials on September 18th, 2008.  The XLF peaked the next day at $22.38 and finally troughed almost 6 months later at $6.26, a decline of 72%.  The SEC’s stated goal with this ban was to “protect the integrity and quality of the securities market and strengthen investor confidence.”  In hindsight, I’m not sure the ban worked out so well...

Coincident with the new German short selling ban, we held a conference call yesterday for some of our top clients that asked the question: Bearish Enough on Spain? As I walked though our thesis, the answer becomes quite obvious, investors are likely not bearish enough on Spain.  I presented a realistic case scenario in which Spain is tripping the wires of 90% debt-to-GDP and 10% deficit-to-GDP in the next 18 – 24 months. (If you would like a copy of those slides and replay of the call, email us at .)

While this is becoming increasingly less the case, an issue that many analysts have when analyzing sovereigns is taking what these Fiat Fools say at face value.  As it relates to Spain, it is advisable to do almost the exact opposite.  On March 7, 2008, Prime Minister Zapatero predicted that, “Spain will achieve full employment. I want to be definite.”

As we discussed yesterday, Spain’s current unemployment rate is 20.05%, which is worse than Iraq and East Timor.  If you didn’t know, now you know . . . Countries Miss the Numbers.  If you don’t believe us that Spain may miss the numbers on their austerity plan, then believe the markets (they are still somewhat free after all) because they are signaling such.

To that point, yesterday Spain came perilously close to its first debt auction failure.   Spain had planned to issue 8 billion euro of short term notes, but the auction failed to attract that amount of bids, so the sale was reduced by 20%.  This is somewhat concerning ahead of Spain’s 10-year auction today and just days after the ECB “rescue” package was unveiled.

Usually I’m the Happy Go Lucky Risk Manager at Hedgeye and Keith is the Grumpy Risk Manager who gets up too early, so I apologize if this note had a slightly more somber tone to it than my prior missives.  But quite honestly, I’m concerned.  This quote from Chancellor Merkel yesterday only underscores my concern:

“The lack of rules and limits can make behavior in financial markets driven purely by the profit motive destructive and lead to an existential threat to financial stability in Europe and even the world. The market alone won’t correct these mistakes.”

Yes, you read that correctly . . . markets and the profit motive are an existential threat to financial stability.

To me, her statement reads as a frontal assault on free market capitalism as we know it.  And that should worry us all.

God speed,

Daryl G. Jones

Managing Director

Doppelgänger Capitalists - XLF