Monday, February 8, 2010

These PIGS Aren’t Flying…

The US Dollar has been on the rise. As a consequence we have seen equities and comodities come under pressure. Part of the blame can go to the PIGS. Below is a reprint from an article by Brian Mikes; it will help you understand why PIGS are in the news and why they are a problem.


These PIGS Aren’t Flying…



by Brian Mikes, Editor

“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.

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.”

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.

I am considering taking a position in UUP in all portfolios.

1 comment:

  1. In and of itself a Greek bankruptcy or bond default should -in theory- not affect the Euro as such very much, Greece being maybe 3% of the total. However, just as a Californian bankruptcy would reflect badly on the "state of the Union" as a whole so would the default of on EU country, coupled with the rising interest rates and thus further destabilisation of the remaining over-leveraged member states, make investors wonder when sovereign default across the board is likely. Thus they wouldn't commit themseves to bonds of longer maturity and that's the beginning of the end.

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