A Sanity Check on the Latest Greek Bailout – Felix Zulauf’s Take, and More

A Sanity Check on the Latest Greek Bailout – Felix Zulauf’s Take, and More

Regular readers likely are casting a skeptical eye at the latest Greek bailout.  When should we take this gift of respite to go short questionable European paper, and the euro itself, you ask?

First let’s turn to one of our favorites, legendary hedge fund manager Felix Zulauf, who spoke some sense into Barron’s Alan Abelson:

In the short run, Felix says, the plan, as we’ve seen, allows investors to exhale and markets to rally. But once the touch of euphoria plays itself out, the omens are anything but bright. For one thing, the EFSF has only €440 billion in its vaults. That’s more than enough for humble folks like us, but scarcely enough if, as he deems likely, global growth slows and other troubled mendicant governments come cup in hand begging for a bailout.

The European Central Bank, moreover, seems bent and determined to continue to steer a tight policy course out of fear of misusing monetary policy to manage short-term economic problems. The result is sparse liquidity in Europe in contrast to abundant liquidity in the U.S., compelling the shakier members of the union to fund themselves via dollars and turning those bucks into euros. That makes the euro stronger but further weakens the competitive position of the peripherals.

Mario Draghi, the Italian successor to Jean-Claude Trichet as head of the ECB (the change is slated for September) apparently wants to show, Felix suspects, he’s more German than the Germans, which means the bank will be in no hurry to ease up. But come the next crisis and the bank will have to cave and switch to a more accommodative monetary policy. Once that happens, Felix predicts, the euro will take a mean spill.

Full commentary from Felix Zulauf at Barrons.com

(If you get stopped by Murdoch’s pay firewall, try typing Back From The Brink into Google, and click on the link from there, to access)

Hat tip JL for the heads up on our boy Zulauf’s take

The euro continues to defy those determined to short it…though it has put in a series of lower highs and lower lows since May:

euro price chart august 2011

The euro has already been in a downtrend since May – a sign of things to come?

(Source: StockCharts.com)

Gold, though, called “bullshit” on the euro years ago…there’s no questioning this trend, as the euro relentlessly grinds lower against “real money”:

euro priced in goldStrong euro? Not when priced in real money.

The bond markets were not as impressed as the financial media was about the Greece plan.  Yields on Spain and Italy 10-years eased…but just a bit, remaining above their recent “breakout levels”:

Italy 10 year bond yield august 2011Italy 10-year bond yields ease, but remain above pre-July levels. (Source: Bloomberg)

Spain 10 year bond yield August 2011Same goes for Spain.

Finally, Italian bank bellweather Unicredit declined another 4.5% on Friday – another large foreboding yawn from the market.  (Hat tip S&A Digest for the initial heads up on Unicredit).

Trading ideas:

  • The ETF EUO is the double short euro fund.  It is starting to break out as the euro breaks down.  EUO can be tricky, though, as the double leverage can chop your returns if your timing is not on point.
  • Experienced traders may be intrigued by the possibility of shorting Spain and Italy 10-year bonds directly once the bailout news runs its course.  Though you may need an account with someone like Interactive Brokers to do so – I’m not aware of any “lazy” ETF options offhand.
  • And/or those with a longer time horizon may just want to continue to trade in their fiat paper money for physical gold and silver, as this ongoing saga is unlikely to send Western currencies higher anytime soon.