Sage Weekly Letter
- Posted by Robert Sinn
- on January 8th, 2012
US equity markets kicked off the new year with a bang as investors continue to view the US from a “glass is half full” perspective. US economic data continues to impress and chart a generally upward trend, whereas, European economic data is much more uneven with many parts of the eurozone periphery flashing strong signs of recession. The German economy has managed to weather the debt crisis storms with alacrity – The German unemployment rate remains in a steady downtrend while other eurozone members such as Spain can only gaze with envy:
Even German economic sentiment has had a recent uptick despite a steady downtrend in euro area economic sentiment remaining well in place. The decline in euro exchange rates ($EURUSD, $FXE) has added jet fuel to the German export juggernaut which will only serve to enlarge an already wide economic/fiscal gap between Germany and its euro neighbors.
The recent steep fall in EUR/USD to below the 1.27 level on Friday has been a little surprising given the overwhelming bearish sentiment toward the common currency, and the record speculative net-short position in euro futures:
Markets have an uncanny knack for punishing crowded trades; therefore, the relentless decline in the euro (with hardly any bounce) is a sign that large players simply want out of the currency. Bruce Krasting wrote an interesting blog post wherein he details some of his thoughts on EUR/USD and outlines an option to help the eurozone (EZ) over the near term which I haven’t heard widely mentioned before:
“What is one option that is not now being considered and would have a beneficial affect on the EU? Simple. Devalue the currency by 20%…..A significant devaluation would be a big boost to short-term economic prospects for the EU. It would do little for the solvency/funding problems. But it would stimulate growth and create some jobs. Without that, the EU is dead anyway, so devaluation is not out of the cards.”
Bruce and I have never met but I like him already – He is correct that a 20% devaluation would have a hugely beneficial effect for EZ economic prospects in the short-term. Such a devaluation would be much less painful than other alternatives such as members exiting the EZ or continuing on the insane path of austerity which is sure to plunge most of the EZ into depression.
However, such a euro devaluation would have a tremendously negative impact upon the competitiveness of US exports to the eurozone. Any corporation which incurs costs in dollars ($DX_F $UUP) and receives sales revenue in euros ($FXE) would experience a drastic overnight drop in competitiveness. Start compiling your lists of companies which fit this criteria – $F, $GM, $KFT, and $WHR are the first to come to mind.
For the last month investors have enjoyed a respite from major negative eurozone headlines, I expect this respite to come to an end over the coming weeks:
- Greece is in dire straights and does not belong in the euro – Will the other EZ members agree to an unlimited series of fiscal transfer payments in order to keep Greece propped up?
- Sovereign yields (Italy, Spain, etc.) remain at unsustainably high levels – Hundreds of billions of euros of debt will be issued by financially troubled EZ members over the coming months, I expect these debt sales to be bumpy.
- Many EZ member nations (Greece, France, etc.) will hold important elections between now and May – Not much has been made of the fact that Sarkozy is unlikely to be re-elected as French President on April 22nd, and the current front runner Francois Hollande (socialist) has a much different concept of how the EZ should function than the current Merkozy concept.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.blog comments powered by Disqus
Robert Sinn is a professional trader and market analyst who focuses on multiple asset classes including equities, futures, options and currencies. He integrates fundamental and technical analysis. More »