My contrarian trade: go long Spain and short the U.S.

Author: Lelio Vrancovich

Covestor model: Technical ETFs

Given all of the negative stories about Europe, and Spain in particular, most investors are terrified about the ramifications of the crisis. My point of view is that while the problems in the old continent are very serious, the stock markets across Europe have in general already discounted a lot of bad news.

Let’s take a look at the two worst offenders in the Eurozone, Spain and Greece. Spain’s IBEX 35 Index is down over 60% from its recent top to bottom, and Greece’s Athens General Index is down by about 90% since it peaked a few years ago.

What we are witnessing here are declines of the same magnitude of the Great Depression. These drastic drops are warranted given the economic conditions at the present time, but at the same time most investors have already probably adjusted their expectations downward and the brunt of the selling is probably over by now.

I am not saying they will not decline any further, just that the opportunity to sell has already passed and that we should start looking into possibly making some purchases in the near future.

I keep hearing discussions in the media about a Lehman type event which will inevitably happen in Europe any day now. I think the investing public and the media forget that back in 2008 when Lehman went under the expectations in the US were for a soft landing and the markets were down by around only 15%.

Hardly the same situation we are having right now, everybody is now expecting for the world economy to grind to a halt. I would be willing to enter into a long term trade by going long Spain and short the US as a hedge, I think it would prove profitable over the next two years.

As far as the model portfolio goes, we are still going to hold on to our current positions with the expectations that we will see large gains before the end of the year. Its going to be difficult to make any progress while the euro continues to be weak, as gold usually moves with the euro and against the dollar.