Stay away from European Equities and Why.

MarketWatch commentator Charles Sizemore wrote an article that says that the German government’s actions are key to the future of the Euro and the Eurozone.  He’s right about that because Germany is the most solvent of the EU nations, but he has way too much faith that the German government will come to the rescue of the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) governments.  My comments are in red.

Aug. 14, 2012, 12:01 a.m. EDT

Here’s what keeps me awake at night

By Charles Sizemore

September 12, 2012. This is the date that may ultimately decide the fate of the euro zone.

It has nothing to do with Greece, Spain, Italy or any of the other problem children of Europe. No, it is Europe’s stern school mistress Germany that holds the fate of the currency zone in the balance.

On Sept. 12, the eight justices of Germany’s constitutional court will meet to decide the legality of the euro zone’s rescue fund or, more accurately, the legality of Germany’s participation in the bailout fund under the German constitution. Should Germany back out due a court veto, it’s difficult to see the euro surviving the crisis of confidence that would follow.

The German government can’t afford to bail the PIIGS out forever.  The PIIGS have social welfare programs that are still growing.  There is no “real” austerity going on.  The PIIGS simply cut back on the rate of growth and call that “austerity”.  They will be back for more handouts.  The German Constitutional Court knows this.


Americans are no strangers to debates over constitutionality. The 5-4 decision to uphold the Obama administration’s health care overhaul was one of the biggest headlines of 2012. But the German debates are a very different animal.

There are two competing clauses in the German constitution. One declares Germany to be "a democratic and federal state" with power determined "through elections and other votes."

This would seem to preclude Germany from granting control of its budget to an EU watchdog or obligating the German state to bail out euro zone neighbors; the judges have already questioned whether such transfers of sovereignty are permissible.

But then, the German constitution also calls for Germany to strive for a "united Europe," which would be presumed to include some degree of fiscal union. In effect, the fate of Europe depends on which clause of the German constitution the justices decide take precedence.

When clients ask me "what keeps you up at night," this is it. I fear that lack of German commitment could cause the entire European project to unravel.

This obviously doesn’t keep him up at night because he says later in this article that he is long European equities.  He’s so worried at night that he has an overweight allocation to European equities.

If the German court finds the bailouts unconstitutional, then Germany would have to amend or even rewrite its constitution in order to participate — which would require a referendum. And how likely does that sound?

The German voters will not support an amendment to their constitution that signs them up for a permanent bailout of the PIIGS.  Only the German politicians are eager to tax the German people for the money.

Even if a charismatic leader were to convince German voters that constitutional change is the right thing to do, these things take time, and time is a luxury that Europe doesn’t have at the moment.

Now that I have sufficiently scared you, I should point out that I do not see the German constitutional court torpedoing the bailouts. They know what is at stake, and they don’t want to be responsible for the death of the European project.

The German Constitutional Court knows what is at stake.  They know that the PIIGS will be back for more, and more, and more.  They know the Euro is in serious danger and  will likely die anyways, so why drag Germany down with it.  The court members have not staked their careers and legacy on the idea of the United States of Europe.

I am comfortable being invested in European equities, and Sizemore Capital has an overweight allocation to European equities in its Tactical ETF and Sizemore Investment Letter portfolios.

Charles Sizemore is a Keynesian investor and is going to lose a lot of money for himself and his clients if he believes that the Euro can be saved by Germany and the ECB printing press.  The Euro would have been saved already after 23 summit meetings if it could be.  There is no way to stop the PIIGS from defaulting if they don’t implement drastic government spending cuts.  Look at the voter backlash in Greece.  The voting population doesn’t want austerity.  The Greece voters want the free handouts from the northern European countries like Germany and Finland.  It can’t go on forever.

Still, investors have to consider the "what ifs" when they put capital at risk, and it makes sense to keep a little cash on the sidelines — just in case. It wouldn’t be the first time that ideology trumped pragmatism in a high-profile court case.

A growing number of Greek citizens are putting their money in German banks so that it is out of the country if Greece exits the Euro.  Some are converting it to Bitcoins to escape a possible devaluation in the event that Greece leaves the Eurozone before Germany or Finland.

If we get a selloff in the days leading up to the court’s decision, I would view it as a buying opportunity. But if the German court strikes down the bailout facility or attaches so many conditions as to make it unworkable, I recommend that investors consider selling all European equities and all but your highest-conviction core American positions as well. Because at that point, the probability of a full-blown meltdown on par with that of 2008 becomes uncomfortably high.

Let’s assume that the German court approves of the bailout facility and attached so few conditions to make it completely workable.  This will only slightly delay the day of reckoning for the Euro.  Again, the PIIGS have not changed any social welfare policies that go them into the unsustainable mess.  There is no real austerity (drastic government spending cuts).  So, they will be back for more bailouts, but the next time it will be time for the Germans and other northern Europeans turn to pay up.  What happens to the European stocks at that point in time?  They go down.  Why do they go down?  Because saved capital will be diverted from equities to taxation or the buying of PIIGS and European government bonds.

Stay away from European equities and Mr. Sizemore’s investments.

Disclosure: I own no equities at this time.

This commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.

Disclosure: Mr. Sizemore is long European equities.

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Published in: on August 15, 2012 at 12:07 pm  Leave a Comment  

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