Europe is the center of Downgrades
Moody's just downgraded Ireland to Junk. Greece is junk. Portuguese debt is junk. The good news is that the ECB has been loading up on Junk bonds as the debt ratings get worse -- leading to what inevitably will be a bloodbath of losses when they default. How do you profit from this massive amount of stupidity? Sell the Deutsche Bank of Frankfurt, Germany (NYSE: DB).
(Click chart to enlarge)
If you don't know who Reggie Middleton is, perhaps you might be interested to know that he rode the real estate bull market up and got out of the way when it collapsed as well as pointed out several of the bank failures in advance. I particularly find his perspective useful at this point in time because we are still dealing with the same sort of problems -- so this is Reggie's forte.
- Germany will be hit the hardest from a Sovereign Default. Germany has been relatively prosperous lately and its strength is exaggerated because the weaker components in Europe are dragging down the value of the euro for Germany -- effectively causing a temporary boom in Germany at the expense of the periphery nations, which only results in ostensibly larger bailouts of the nations that are now past the point of no return.
- The banking sector is under collateralized across Europe. Those in charge are presently pretending as if the limitations of ownership are endless and that a contractual arrangement to exploit an entire nation is enforecable even past the point where the majority of that nation ceases to benefit from that arrangement that was designed to be permanent but only later was discovered to be temporary. The ECB has been a lot like BP when it tried to plug the well in the Gulf of Mexico recently. The ECB doesn't really know what it's doing and is just throwing good money after bad. The actions in effect are growing systemic risk, not dissolving it.
- The Euro is structured to fall. The EuroZone countries that are effectively in default at this point in time have no way to ever make good on their debt. As such, the Euro is not structurally sound because the countries do not all hold themselves to the same accountability standard that is necessary to have a singular currency.
- Germany + Banking = Deutsche Bank. It's simple math really. In the short run, Deutsche Bank will continue to be able to extend and pretend and act like any other solvent bank. With the Euro crashing and private investors intelligently staying away from re-collateralizing a system that is structured for insolvency, bet against the bank that looks the safest but in all actuality carries the most systemic risk. I choose Deutsche Bank. Not to mention that, as the Euro gets weaker, discount the cash flows from a bank that makes its money denominated in Euros. Sure, it does business in America. But, perhaps it might be interesting if you look into the homes that it is walking away from in Illinois.
10% Drop is Just the Tip
While Reggie called the timing for a quick 10%, I see no reason to lay-off the slide at this point. Once you push your sled down a snow covered hill and it gets up to speed with lots more hill to run, you might as well hold on for the ride of your life.