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Spain Is The Next Greece – Avoid EWP

Summary A political push is underway in Spain that appears to me to have a lot in common with Syriza’s rise to power in Greece. Leftist politicians have won a majority of Spain’s municipal elections and taken control of key cities including Madrid and Barcelona, and they have their eyes on national control. If Spain is going to be the next Greece, then its future actions and direction are not likely to sit well with its Eurogroup partners. The investment community is likely to see this as “contagion,” and that does not bode well for the euro, European equities, and judging by the developments in Greece, Spanish equities. Thus, no matter what happens between Greece and its creditors, it would seem wise to avoid Spanish stocks and the iShares MSCI Spain Capped ETF. Some pundits believe that any sort of closure for the Greece issue is a plus for Europe, whether Greece stays in the eurozone or leaves it. But there is one European market sector that I do not see a positive outlook for either way. Spain looks to be the next Greece because of a political circumstance similar to what occurred in Greece before the current crisis heated up. Thus, I suggest investors sell the iShares MSCI Spain Capped ETF (NYSE: EWP ) and Spanish stocks generally. A succession of leftist political victories in Spain too closely resembles what happened in Greece before it raised issue with its creditors. I believe it will lead to division between Spain (perhaps emboldened now by Greece’s display of strength) and more progressive economies to the North. While Spain is not in the same situation as Greece, its political policies and direction moving forward are likely to trouble investors. Before Syriza, a decidedly left wing party, was elected into power in Greece, everything seemed to be improving, at least from our perspective over here. The economy was growing and the budget was operating at a surplus. Yes, there was still extremely high unemployment and unbearable taxation for a people suffering in strife, but from the perspective of those on the outside Greece was doing better. It was, in the end, the pain and suffering of the people that allowed the political candidate (Tsipras) calling for an end to austerity to overcome the reigning government’s plea for patience. Guess what’s happening in Spain today? The Leftists are Coming! This month, a wave of leftists (not my description) won victories in municipal elections across Spain. The political push in Spain sure resembles the same movement that took control of Greece and led Europe and relative investors into today’s turmoil. In the comment section of the article I linked to here, the first comment says something like, “This must be the Greek contagion they were all afraid of. This won’t end well.” I agree, but would add, this won’t end well for European stocks and debt and the euro, and especially Spanish equities. The newly elected municipal leaders in Spain easily overcame their predecessors with popular campaign pleas. For instance, one new mayor is working to put the victims of foreclosure (that’s how they see it) into homes foreclosed upon and held by banks. Back in Greece, Syriza won with promises to hire back laid-off public sector workers, reduce taxes and to restore old pension norms. But what the so-called leftists in Greece and Spain will have in common is an aversion to German inspired austere budgeting. So then the leftists in Spain are likely to cause a fuss, and I suspect they’ll stare their national intentions now that the Greeks are on the marquee. Opportunistic politicians with plans to take control of Spain this year should find opportunity now to organize gatherings in support of the Greek people. I would be surprised if it doesn’t happen. It will draw global investor attention to the contagion they all feared might spread across the PIIGS (Portugal, Italy, Greece, Spain – I’ll leave out Ireland) of the eurozone periphery. And when the leftists unseat the ruling power atop the Prime Ministry in Spain this year as I expect, we will all have to take note. 10-Year Chart of EWP at Seeking Alpha Just like it played out for Greece, none of this weighs well for Spanish stocks. It portends rather that this 10-year chart of the iShares MSCI Spain Capped ETF , which seems to show stocks going up and down before ending up at the same place, will continue to do so while sporting a new leg lower. Indeed, EWP was one of the poorest performers of the eurozone on Monday, as this secret seems to be leaking. EWP fell 5.2% on Monday, while the iShares Europe ETF (NYSE: IEV ) dropped just 3.4% and the iShares MSCI Germany ETF (NYSE: EWG ) fell 4.0%. The Global X FTSE Greece 20 ETF (NYSE: GREK ) fell 19.4%, since it was the star of the show. Take note that the German ETF was doing quite well this year, but EWP had a negative year-to-date performance record heading into the black day for Europe. Things just got worse for Spain. The political change overtaking Europe is a problem for the euro, but the Swiss National Bank (SNB) and the European Central Bank (ECB) have managed to manipulate the currency well enough to turn a 1.9% overnight loss into a sharp gain by Monday afternoon. The SNB flooded the market with Swiss francs (the safe haven for capital running from the euro at the time) to weaken the franc unnaturally against the euro and support stability (or illusion) in Europe. It’s going to get harder to hide this mess, though, when the Spaniards hit the streets in solidarity with Greece or when these new party candidates win national elections. I found a CNBC report interesting today, as I watched Sarah Eisen report that currency traders believe the euro has not yet given way because of no sign of Greek contagion. Well, I agree but I’m saying that is exactly what is about to change. So, friends, I would keep this in mind when venturing investments in European shares and especially when considering the iShares MSCI Spain Capped ETF, which I would avoid. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

If Greece Defaults, Buy These 4 ETFs To Profit

Unless you haven’t been paying attention at all over the last few months, you should be well-aware of the tumultuous situation taking place in Greece right now. Thanks to a huge debt load and few good choices, Greece appears to be perilously close to an outright default, and with payments due at the end of the month, it appears as though Greece may be out of options. If a default happens, it looks to be catastrophic for the Greek markets, at least in the near term. While it might help to promote long-term growth (eventually), the short-term pain could be quite severe and especially if we use the Global X FTSE Greece 20 ETF (NYSEARCA: GREK ) as a proxy. This fund was down over 15% in Monday trading on extremely heavy volume while it has been having a horrendous 2015 as well. In fact, since the start of the year, the Greek ETF has lost over one-fourth of its value while the S&P 500 has remained more or less flat in the same time frame. What’s an Investor to Do? Worries over a Greek default are not limited to Athens by any means though. A number of European banks stand to lose a great deal in a default scenario while a variety of other European markets could be impacted by Greece leaving the euro. And with Europe being a major market for U.S. corporations, it shouldn’t be surprising to note that many American stocks are being hit by this turmoil too. Save for a few rate sensitive beneficiaries, pretty much every U.S. stock has been rocked by European concerns in the past couple of days. However, there are a few places where you can stash your cash in the ETF world in this difficult time. Below, we highlight four exchange-traded funds that look to offer up stability – or even profit – as the Greek situation continues to unfold: SPDR Gold Trust (NYSEARCA: GLD ) In difficult market environments, gold is considered a great store of value. And when you aren’t sure what your currency is going to be at the end of the year, gold becomes even more important and especially so given the long list of bank closures and currency concerns hitting the Greek market right now. These worries could impact other European markets too, increasing gold demand across the continent. We have already started to see this trend take place as GLD is pretty much flat over the last five sessions though GREK has lost 16%, the S&P 500 has declined 2.4%, and Vanguard FTSE Europe ETF (NYSEARCA: VGK ) (broad Europe) has fallen over 5%. For these reasons, a look to the most popular gold ETF of GLD could be an interesting way to hedge exposure in the near term. And if you are looking for a slightly longer-term investment, iShares Gold Trust ETF (NYSEARCA: IAU ) is also a viable option as it charges a bit less in fees though it doesn’t have as tight of a bid ask spread (due to having a lower per share price). iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) Concerns over a rate hike have plagued bond ETF investments as of late, but the Greek situation could be just the kick to get things moving back in the right direction. After all, given the uncertainty in Europe, the demand for safe American bonds will increase, helping to push yields lower in the process. We have already seen part of this take place with TLT as lower rates help to boost the prices in this fund, as it added about 2% in Monday trading. And if Greece slides closer to default, look for the gains to continue here as more investors pile into American debt. It should be noted that there are a variety of bond ETFs trading in the market right now, but TLT and other long-dated securities look to be the biggest winners. That is because they are the most sensitive to changes in rates so a big drop stands to make these securities benefit more than most in the fixed income world. iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA: VXX ) The VIX is often known as the ‘fear index’ as it can surge when investors are skittish about the market’s current direction. Obviously, this is the case right now, and we have been seeing prices for the ETN tracking this benchmark, VXX, surge as a result. VXX was up double digits in Monday trading, and I’d expect this trend to continue as the Greek situation becomes increasingly dire. Just remember that this is a terrible long-term investment due to the futures curve, so be careful when trading volatility. VXX has lost over 35% of its value so far in 2015, and most of this is due to a difficult futures curve which makes long-term investing very hard. With that being said, an outright default in Greece will likely make this ETN a big winner and a very liquid choice for traders seeking to make a bet on fear levels in the market. Volume levels here average over 38 million shares a day, and if anything I think you could argue we were long overdue for a bout of volatility in markets. ProShares UltraShort FTSE Europe ETF (NYSEARCA: EPV ) If you are looking to outright bet against Europe, then an inverse ETF could be the way to go in your portfolio. A fund that offers to pay the opposite of the return of a European benchmark seems built to profit in this uncertain time, and that is exactly what investors have with EPV. This ETF tracks the -2x return of the FTSE Developed Europe Index, which is a broad-based benchmark offering up exposure to a number of European companies across the continent. The euro currency accounts for about half of the exposure in the ETF, while financials make up the biggest single allocation at 22% of the total. The fund is up about 5% today, and it could continue to rise if the Greek impact ripples across the continent. Just remember, this is a daily resetting ETF, so it isn’t really intended for long-term investors (though the -200% daily factor should have been a clue to that as well). Original Post

Rising Correlations With Greece In Graphs

Graphical depiction of the correlation between Greek stocks and the rest of the Eurozone. Correlations have been rising as we careen towards a hard deadline on an extension of the current bailout agreement. If a disorderly outcome in Greece unduly drags down stocks in core countries disproportionately, long-term investors should view it as an opportunity. With the Euro-area finance ministers denying Greece a short-term extension of the country’s bailout and with no future financing in place, we are in for a potentially tumultuous week ahead. The Greek government in turn has called for a referendum vote on demands international creditors have made on the country in exchange for ongoing financial aid. Correlations between the exchange between the Euro Stoxx 50 (NYSEARCA: FEZ ) and the Athens Stock Exchange (NYSEARCA: GREK ) have been rising in recent weeks as the ebbing market perception of the likelihood of a deal is felt throughout the continent’s equity markets. Source: Bloomberg As recently as the end of March, the rolling one-month correlation between Greek stocks and a broad gauge of Eurozone stocks was zero. This makes intuitive sense. Greek stocks were subject to increased volatility following the election of the anti-austerity Syriza party in late January. European stocks were rebounding on the back of strengthening European economic data, but Greek stocks were being pulled lower due to the increased uncertainty around its financing package. In recent weeks, Greek stocks and their European counterparts have been seeing heightened correlation as graphed above. If broader European stocks hit an air pocket next week in the face of the Greek referendum vote, broader European stocks could be pulled down unduly in sympathy amidst this heightened correlation. The median company in the Euro Stoxx 50 has a market capitalization six times larger than bottler Coca-Cola Hellenic, the largest company in Athens Stock Exchange, which represents nearly one-fifth of that index. European stocks are being led by the nose by an economy that makes up less than two-percent of its economic output. As I wrote following my recent trip to Greece , if there is a disorderly outcome, the European financial system should be much better equipped given stronger capital ratios, new stability mechanisms, the deployment of quantitative easing, and lower sovereign yields in the periphery. Near-term dislocations due to outsized correlations with Greek stocks and that of the rest of Europe should be viewed as a longer-term opportunity to grab exposure to developed markets that have lagged the performance of the United States post-crisis and could potentially deliver higher forward returns . Disclaimer : My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.