Europe came through over the weekend with its latest Band-aid for the continent. In the biggest move since the ECB's 1T euro LTRO, Spain's banks will receive 100 billion euros as part of a recapitalization. Unlike the LTRO which buoyed the market for months, I believe this latest effort's impact on our market is likely to have the half-life of a fart. It is also likely to have unintended consequences just like its LTRO predecessor. The LTRO was designed to provide European banks 1T euros in three year loans at a 1% interest rate in the hopes that this would revive the lending market and make loans easier to get for Europe's companies and consumers. Unfortunately, most of it went to Italian and Spanish banks that used it to buy their country's sovereign debt essentially taking the money at 1% to invest in government debt at 6%. Of course, the net effect was tied the banks even more to the overall health of their countries.
Signs Europe is still in a downward spiral:
- Instead of going down based on this latest bailout, yields on Spanish and Italian 10 year debt actually are up over 20 basis points this morning.
- John Hussman makes a solid argument that this bailout (and all bailouts before it) is the wrong medicine for the overall problem. Definitely worth reading for anyone that thinks this latest initiative will solve the problem.
- If that is not persuasive argument, David Einhorn's chart on previous bailout efforts might be.
- The bailout may have the unintended consequence of undermining Spanish Prime Minister Rajoy's political authority and financial credibility in the markets.
- The bailout also will not be without strings unlike pronouncements to the contrary.
- In case anyone forgot about Greece, they hold elections this weekend. Any result that does not lead to a coalition that supports the previous bailouts' provisions could lead Greece to run out of money (other people's, of course) in a matter of weeks.
- Italy is contracting at 1.4% annually currently. This is from a country that is on the line for 22% of this latest bailout?
- Even with latest bank bailout, Spain still does not have a good handle on its banking system.
Be careful out there as Europe still has not begun to address its core issues. Use any rally to lighten up on high beta names, especially if your portfolio is lacking dry powder. In addition, consider shorts in select overvalued names like LinkedIn (LNKD).