I’ve written extensively about the ongoing housing market depression in the United States, but we’re not the only country facing this problem. On the other side of the pond, they call it a “property bust,” and it may have been more damaging in the UK and the whole of Europe, as their banks are more thinly capitalized than U.S. banks.
The overall European economy is also weakening, based on conversations I’ve had with German, Irish, British and French consumers and business people. They are aware that more austerity is coming, meaning declining incomes, rising unemployment, and the potential for strikes and other forms of disruption.
I spoke at length with a senior Scottish merchant banker (one of the people who lend money, short term, in order to finance trade and the shipment of goods and commodities), who said business in Europe is “dead.” He sees great growth, especially in certain commodities in South America and parts of Asia, and weak growth in the United States, but, according to this merchant banker, Europe is “dormant.”
It seems that the Greek bailout and the faked bank stress tests brought on a temporary euphoria, but that feeling is fading fast. The political situation is also worsening as opinions are hardening about the aforementioned public-sector spending. Proposals backed by Germany to punish European Union members who violate guidelines for deficits and debts are splitting the EU into two parts — those for austerity now and those for austerity later.
A key index, the Markit Flash Eurozone Composite Output Index, fell to a seven-month low of 53.8 in September, well below expectations. This is consistent with GDP growth of about half a percent and similar to data coming out of the United States. In other words, the falloff in September was unusually sharp.
These economic and political problems are creating concern about the future health of European banks if countries default on bonds, because other EU members will not help them out.
The way to play this is with put options on the Banco Santander, S.A. (NYSE: STD). STD faces enormous problems in its home market of Spain. The country has the worst property market in Europe, 20% unemployment, and massive budget deficits.
And STD will certainly need to dilute in order to raise more capital to pay for its purchase of the retail branches of the Royal Bank of Scotland Group plc (NYSE: RBS) and to protect itself against future write-downs.
In addition, the stock’s chart is showing signs of technical weakness after a major run.
I recommend buying the STD Dec 12.50 Puts under $1.15.
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