by Charles Sizemore | April 25, 2012 9:27 am
Conditions must truly be dire in Europe. King Juan Carlos of Spain was forced to publicly apologize for going on an elephant hunting trip in Africa while his kingdom is in the middle of a major banking and debt crisis; this was just weeks after His Majesty said that Spain’s youth unemployment was keeping him awake at night with worry.
I write this in an attempt at humor, of course. I have a lot of respect for King Juan Carlos, and I’ll refrain from poking fun at him. Some readers might remember that the man was almost single-handedly responsible for Spain’s transition from military dictatorship to democracy in the late 1970s; he made Spain a modern country by sheer force of personality. He also is widely loved by Spaniards of all ages and political persuasions.
So the fact that a royal hunting trip caused this big of a stir is testament to how edgy conditions are in Europe. Spain fears continue to rattle the market, as do new developments from France and the Netherlands that have raised serious doubts about Europe’s ability and willingness to get its debt crisis under control.
Socialist Francois Hollande beat incumbent President Nicolas Sarkozy in the first round of the French election, and odds are decent that he will win the runoff election on May 6.
Mr. Market did not take this well. Hollande has pledged to “renegotiate” the fiscal austerity treaty agreed to last year, preferring instead to take a path similar to that of the United States. This would mean a higher tolerance for budget deficits in the immediate future in the hopes of avoiding a deeper recession. You know that we live in extraordinary times when a French Socialist has more in common with the presidential administrations of Barack Obama and — gasp! — George W. Bush than with his fellow Europeans. Yet such are the times we live in.
Whether Hollande wins the election will depend on how the roughly 20% of French voters who cast their votes for the far-right candidate Marine LePen. In the meantime, we have uncertainty — and markets hate uncertainty.
Adding to this, the Dutch government coalition collapsed over proposed austerity measures. The Dutch historically have been “good Europeans” who rarely made a fuss. This adds yet another element of uncertainty at a time when we already have more than enough.
Oh, and if only that were all. If the debt and austerity issues were not bad enough, Argentina decided to play the retrograde nationalist card and seized the assets of Spain’s Repsol (PINK:REPYY) in the country. Argentine president Cristina Fernandez de Kirchner nationalized 51% of YPF (NYSE:YPF), the former state oil company, immediately sending shares of Repsol down 15%.
At time of writing, the Spanish 10-year bond yields are over 6%, the highest level since November. This is not sustainable, and one of two things has to happen from here:
What is killing the Spanish stock market right now — and Sizemore Investment Letter recommendation Telefónica (NYSE:TEF) — is, again, the uncertainty.
There are, however, a couple points on which we can be certain.
I’ve been asked if it makes sense to sell Spanish stocks today with a mind to buying them back at a lower price in a few weeks to take advantage of a snap-back rally when it eventually happens. The problem with this line of thinking is that no one knows when the ECB will decide that enough is enough and intervene. It could very well happen in the time it takes you to read this article.
I view the Spanish market as a coiled spring ready to pop, and I want to be ready when that happens.
Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, Sizemore was long TEF. Sign up for a FREE copy of his new special report: “Top 3 ETFs for Dividend-Hungry Investors.”
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