Europe: The Euro Zone Is Heading Off A Cliff (IEV, VGK, EUO, VWO, FXE)

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May 15, 2012 12:04pm NYSE:EUO NYSE:FXE

Mike Larson: Europe is a lovely place to visit. The amazing architecture. The outstanding food. The multitude of cultures and languages. Personally, I can’t wait to honeymoon there in June!

But when it comes to the economy, I don’t think it’s a stretch to say Europe is heading off a cliff! From one end of the Continent to the other, the numbers suggest a double-dip recession is striking with brutal force — despite the hundreds of billions of euros politicians and central bankers have thrown at the problem!

Just consider the following …

==> A key industrial activity index in the euro zone tanked to -9 in April. That was the worst reading in 25 months.

==> The main European purchasing managers’ index fell to 45.9 in April, a nine-month low. Italy sank to a six-month low, while Spain dropped to a 34-month low.

==> Those poor “PIIGS” results weren’t all that surprising. But what WAS surprising is that Germany’s manufacturing index sank to its own 33-month low! That proves the recession is spreading from the periphery of Europe to its very core!

==> Unemployment in the 17-nation euro zone rose to 10.9 percent in March, the most since the euro currency was launched 13 years ago. Plus, German unemployment unexpectedly rose by 19,000 to 2.87 million, another confirmation of Europe’s spreading sickness.

What’s Doubly Troubling about Europe — and Its Banks!

A double-dip recession is bad anywhere. It hurts corporate earnings, drives bankruptcies higher, causes loan losses to surge, and more. That’s one reason I’m getting increasingly worried about the condition of Europe’s banks.

But there’s an even more serious issue we have to consider …

Not only do those banks have to worry about growing losses on private securities and private loans. They also have to worry about massive losses on the public securities they hold — a gargantuan hoard of government bonds that has only gotten larger in the past few months.

You see, the European Central Bank (ECB) was able to tamp down the crisis in the European debt markets temporarily in late 2011 and early 2012. It did so by doling out one trillion euros in nearly free money to hundreds of banks across the Continent via the so-called Long-Term Refinancing Operations, or LTROs, I’ve mentioned before.

The banks could have used that money to lend to companies and individuals who need it. They could have shored up their balance sheets. But they didn’t. A just-released ECB survey showed that small business access to credit is on track to fall another 7 percent in the coming few months after collapsing by 20 percent in the past quarter.

Europe's small business owners have only seen a pittance of the trillion euros the ECB gave out.
Europe’s small business owners have only seen a pittance of the trillion euros the ECB gave out.

So what did the banks do with all that free money? They bought even MORE of the same, lousy sovereign bonds that got them into trouble in the first place!

Spanish banks increased their holdings of Spanish government bonds by 26 percent to 220 billion euros in the first two months of 2012. Italian banks raised their stake in Italian government debt by 31 percent to 267 billion euros. And Irish banks boosted holdings by 21 percent, while Portuguese banks jacked up their exposure by 15 percent.

My Warning? Ignore Europe at Your Own Peril!

Bottom line? You have a European economy that’s sinking into a double-dip recession. And you have a European financial system that’s buried under a massive — and GROWING — mountain of troubled sovereign bonds.

It may seem easy to brush those concerns under the rug. Certainly some investors are doing exactly that, what with the Dow Jones Industrial Average trading around 13,000 and change. But I urge you to keep your eye on the big picture.

With the world as interconnected as it is these days, what happens in Europe WILL impact our companies and markets here. We’re already hearing some companies warn that weakness over there is hurting their bottom lines. I expect to hear more such warnings, and for investors to sit up and take notice.

So please make sure you have select downside hedges in place! Also make sure your upside plays are in ironclad, rock-solid companies that can withstand the deepening European crisis!

Related: iShares S&P Europe 350 Index (NYSEARCA:IEV), Vanguard European ETF (NYSEARCA:VGK), ProShares UltraShort Euro ETF (NYSEARCA:EUO), CurrencyShares Euro Trust (NYSEARCA:FXE), Vanguard MSCI Emerging Markets ETF (NYSEARCA:VWO).

Until next time,

Written By Mike Larson From Money And Markets

Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, 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 MaMare 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 MarketsMoney 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

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