These PIGS Aren't Flying...
The Dynamic Wealth Report
February 8, 2010
I love Wall Street. They have an acronym for everything. If you buy and
sell Exchanged Traded Funds, you’re investing in ETFs. If you buy a BRIC,
you’ve just invested in one of the emerging market countries like
Brazil, Russia, India, or China. You can even buy a CDS, or Credit
Default Swap, to protect an investment in government debt.
Just this week, a new acronym hit the market courtesy of the European
Union - PIGS.
PIGS stands for Portugal, Italy, Greece, and Spain. In other words, it’s
the European countries in deep economic trouble. As you know, real pigs
wallow in the mud… and these countries’ economies are wallowing in the
mud as well.
Some would say the PIGS are covered in… Well, you get the picture.
Why are the PIGS getting so much notoriety these days?
The PIGS countries have massive government debt levels. Their economies
are struggling. And now there is a serious concern over their ability to
make payments on government debt.
These troubles aren’t localized anymore. The troubles, like a bad cold,
are being passed from one country to the next. And it’s hurting the
entire European Union. Nowhere do you see the impact more than in the
crumbling value of the Euro.
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Now I’ll admit, when I first heard about the troubles in Greece I
dismissed them…
But then I started digging. I got down in the mud and the slop (with the
PIGS) and what I found was quite disturbing.
This issue could lead to huge problems in Europe.
The big problem is government debt. The PIGS countries have all issued
debt to finance government works and deficit spending. While each
country is independent and controls their own economic situation… they
all share a common currency.
Let’s follow the money…
By being part of the European Union and using the Euro as a common
currency, the PIGS have been able to issue low cost debt. And debt
levels continue to mount. There doesn’t seem to be an end in sight.
Government spending, especially on welfare programs, is skyrocketing.
And that’s scaring even the most hardened investors.
If the PIGS countries can’t pay their debt, the entire European Union is
going to get hit hard. Why? Because some of the largest holders of
government debt are other European banks! And some of that debt may have
even been pledged to the European Central Bank (ECB) as collateral.
If the government defaults… or if analysts think they might default,
they will see their credit rating quickly cut. And that means the value
of the debt will fall. It will strangle the ability of these government
banks to lend.
It’s like the home mortgage problem all over again… and we all know how
that turned out!
These fears are scaring away international investors.
And that makes attracting international investors difficult. How bad is
it?
The equity markets in the PIGS countries are plummeting… Portugal is
down 12%, Italy has fallen almost 8%, Greece is down a stunning 16%, and
Spain is off over 14%!
It’s so bad the IMF is offering a credit line to Greece!
But it could get worse. If these countries can’t get their budgets under
control, debt levels will spiral out of control. If it gets high enough,
they might be asked to leave the European Union.
Talk about a problem.
The Euro is already falling hard on the economic ripple effect from just
these few countries… can you imagine if the framework of the EuroZone
starts to fall apart? The entire region might be thrown into a tailspin.
Currency investors who have moved over to the US Dollar are doing really
well right now.
The Euro is collapsing, and as a result, the US Dollar is moving higher.
I’m watching Spain very closely. They should be a key bellwether for the
PIGS countries… they are one of the largest. If they can hold it
together, it’s a good sign for the entire EuroZone… if they fall apart…
watch out for more trouble ahead.
Now, these aren’t problems that get solved overnight. So for now,
I’m
staying long the US Dollar.
An easy way to profit from a rising dollar is with the PowerShares DB US
Dollar Index Bullish (UUP). The ETF buys a basket of US Dollar futures
contracts. As the US Dollar rises in value, so should this ETF. Consider
adding some to your portfolio soon.
• Home Construction Industry (Up 1.8%)
The last few weeks have been a bit of a struggle in the markets. Not
many industries are up right now… however, home construction is keeping
its head above water. For the last few years, this industry has been
decimated. Now a number of homebuilders are actually moving higher, the
group is being lead by Pulte Homes (PHA) and
Lennar (LENB).
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