Euro Reveral?

Last night European countries announce last night (on 6/7/2010) they would actually began implementing austerity measures (cuts). Germany, England, and even France,

European growth is going to be hurt significantly, but this should defend the Euro from further decline. The problem, if the Euro gets stronger relative to other currencies, it will hurt their exports and worldwide demand for their products.

The EU is collectively the biggest market in the world, slightly bigger than the US economy. This will effect growth worldwide, both is Asia and the US. In fact, 30-40% of the earnings of many S&P companies are derived from Europe.Therefore the risk of deflation has increased somewhat if the European governments continue to follow through with their statements. But they are doing the right thing. They are causing short term pain for hopefully long term gain.

The Germans knew what the end game would be if they simply kept printing money and borrowing. They remember the Weimar Republic with hyperinflation that crushed their economy. They finally stood up and said no more. All the other European union countries followed suit.

Geithner and the US government was opposed. Why? Because now we are virtually the only country who is continuing this "spend your way to economic growth." Before, when everyone was doing it, they could focus the attention on Greece, or Europe, or even blend in with the crowd. Now we stick out like a sore thumb.

I believe even the mainstream media will now start picking up on this and pick on our enormous spending.

Enough politics, now to investments. What does this mean. It means the Euro should reverse and start to stabilize. At least the risk of the Euro increasing relative to the dollar has increased significantly.

Therefore, early today, I unwound my double short Euro trade for a handsome profit. The charts I have attached shows how the Euro looks to be bottoming and could be a reversal. Even if it doesn't, that's ok, the fundamental risk profile has changed. I will take my money and walk away.

I am, however, still short European stocks, and they should still be in for a really tough road. They were down again today and the trend should continue. E-mail me if you have any questions.

Keep studying,
Dan Stewart CFA®