How To Play The Contrarian View Of Spain’s Bailout (NYSEARCA:EUO)
Tom Essaye: Clearly the big news to start the week: The ECB pledged 100 billion euros to help shore up Spain’s banking sector. So now Spain has joined Greece, Portugal, and Ireland in receiving a bailout from the European community.
The market took the bailout news well; the euro rose sharply, gold fell, and stock futures across the world rallied. But if you look past the headline, you can see that this news isn’t quite as welcome as it would seem.
And in reality …
There Remains Many Unanswered Questions
First off, while 100 billion euros is certainly a mountain of money, the true cost of bailing out the Spanish banks isn’t even known! And it won’t be known until June 21 when a full audit of the Spanish banking industry is released.
Additionally, despite the fact that Spain received this bailout without the restrictions and micro-management that saddle the other three countries, there is certainly a cost to becoming yet another bailout recipient …
You see, Spain will ultimately be responsible for the money going into its banks. As a result, a very indebted nation has taken on even more debt, which is bound to push yields on Spanish bonds to the moon!
In very headline-driven markets such as these, traders and investors should monitor key indicators that are true barometers of a crisis and fight through distracting headlines. That strategy can help you seize contrarian opportunities when the crowd is reacting incorrectly to a headline or event.
The key indicators to watch at this stage of the European crisis remain the euro and the yield on Spanish 10-year debt.
Regardless of the headlines, those two indicators will tell you whether this crisis has really improved, or if the crowd has mis-read the headlines and become too exuberant.
One way to play the market’s immediate, and apparently misplaced, optimism over European headlines is via the Pro Shares Ultra Short Euro (NYSEARCA:EUO). This inverse ETF is designed to rise 2 percent for each 1 percent drop in the euro.
Remember, successful contrarian investors look beyond the headlines and past the market’s reactions, and instead seek the true effect of news or events. The market wants the crisis to end in Europe. And the crowd pushed stocks higher on the news of the Spanish bailout.
While it’s a positive step, it certainly doesn’t solve Europe’s problems — and may present you with a good entry point to profit as the crisis evolves.
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, and Michael Larson. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com/.