Editor's note: We're back on the Digest, but not yet back in the States. Our Atlas 400 event here in Argentina is finished. However, an erupting Chilean volcano is blowing ash around the region, canceling flights and making travel plans a disaster. As such, we'll save the details of our trip for later this week. We hope to be writing stateside by Thursday.
A rallying cry for bankrupt governments around the world has been "blame the speculators." It's not the reckless borrowing and spending that have driven overleveraged countries to economic crisis... It's the rumor-mongering and collusion of short sellers – those evil capitalists who profit from other people's trouble.
We won't go into the ethical arguments of short selling today. Just know we are for it. Short selling keeps markets honest. And in many cases, it exposes fraud and excess. But when economies are crumbling and corrupt governments need a scapegoat, the short seller is an obvious choice. The story in Italy is no different...
Italian politicians, including Prime Minister Silvio Berlusconi's aide Paolo Bonaiuti, blamed their country's deteriorating market on "speculators." Bonaiuti said Italy would be united "in blocking the effort of speculators." It reeks of desperation.
Following a 3.5% decline in Italy's benchmark FTSE MIB Index – the biggest drop in nearly five months – Italy's market regulator, Consob, moved to curb short selling over the weekend. Starting today, investors selling Italian shares short must reveal their positions when they reach 0.2% or more of a company's capital and make new filings for each additional 0.1%. The rule runs through September 9. Consob is also considering banning naked short selling.
Other proposals include limiting credit-rating agencies' influence over the European banking system and allowing failing EU banks to police themselves. Michael Barnier, the EU's financial services chief, told the European Securities and Markets Authority, "To limit over-reliance, we will be strengthening the requirement for banks to carry out their own analysis of risk and not rely on external ratings in an automatic and mechanical way..."
As Digest readers know, we don't have much faith in credit-rating agencies... but we appreciate some semblance of independence. Any downgrades from the agencies would cause EU banks to raise capital reserves, which they can't afford. And it would increase borrowing costs, which they can't afford. Removing the credit-rating agencies from the equation will only extend the period before these banks need a bailout.
Our favorite European "canary in the coal mine," UniCredit, was slaughtered today. The bank's shares halted trading for the second time in a month. It resumed trading and fell as much as 10.5% on huge volume (more than 650 million shares traded).
Porter first wrote about UniCredit in his March 2010 issue. (We've unlocked that issue for all subscribers here... You have permission to forward this). And we've recently updated the UniCredit situation in the June 17 and June 24 Digests. When UniCredit goes down, Italy will follow...
|
The sudden weakness in UniCredit's shares (down 21% in the last several weeks) indicates to me that big trouble is brewing in Europe. I don't believe efforts to stop the crisis in Greece will work. The austerity measures undertaken in Ireland, Spain, Italy, and Greece have severely weakened these economies, causing loan losses to banks like UniCredit. |
|
And if there's a run on UniCredit (and I believe there will be), the losses will be too large for Italy to manage without a huge international bailout. UniCredit has borrowed $300 billion from other European banks. And Italy's government already owes creditors more than 120% of GDP. There aren't any easy solutions to this problem. – Porter Stansberry, June 17, 2011, S&A Digest |
As we predicted, the European Union cannot afford to bail out all its weakest members. According to German newspaper Die Welt, the European rescue fund is insufficient to bail out Italy. Unnamed sources told the paper, "It was never designed for that." The source said the rescue fund might have to be doubled to 1.5 trillion euros.
In addition to a sinking stock market, Italian bond yields are soaring. The yield on 10-year Italian government bonds reached 305 basis points over the benchmark German bund – the highest since the launch of the euro. The 10-year yields hit 5.714%.
The bad news from Europe sent the euro tumbling to a little more than $1.40... just as our options expert Jeff Clark predicted. On July 6, Jeff sent an update to S&A Short Report subscribers saying the euro was due for a breakdown. The chart for the ProShares UltraShort Euro (EUO) – an inverse fund that rises when the euro falls – was consolidating. Based on the negative economic news from Europe, Jeff predicted we'd see the euro fall and EUO would rise. He wrote...
|
The euro must fall. The never-ending bailouts of Greece, Ireland, Italy, Portugal, Spain, and every other overleveraged euro-zone nation is going to take its toll. It has to happen. It's an economic certainty. – Jeff Clark, July 6, 2011, S&A Short Report |
In just three trading days, Jeff's euro trade is already up 36%. In the past month, Jeff has also banked 80% buying calls on Cisco and 75% buying calls on gold stocks. These choppy markets are difficult for the buy-and-hold investor, but they're perfect for Jeff's trading style. He's currently looking to add several more gold trades to his portfolio.
|
New 52-week highs (as of 7/8/11): Prestige Brands (PBH), DirecTV (DTV), WD-40 Company (WDFC)
There's nothing in the mailbag today, as we were out last week. Give us some fodder here... feedback@stansberryresearch.com.
Regards,
Sean Goldsmith
Buenos Aires, Argentina
July 11, 2011
Stuck in Buenos Aires... Blame the speculators... UniCredit halted again... Euro collapsing... Geithner warns of "catastrophic" consequences...