Sliding Euro an Ominous Sign

Mike Markowski, who runs an online cash flow monitoring service, sees the stock market poised for a massive sell-off centering around the Euro -- the kind that could send the Dow to 5,500 to 6,000 by year end.
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Call it Eurotrash. No, not the tasteless European who comes to the U.S., puts on airs and boasts of fame, wealth and nobility (none of which he has), but the trashing of the Euro.

Mike Markowski, who runs an online cash flow monitoring service, StockDiagnostics.Com, says every investor should focus on the latter version because of his contention that the steady erosion of the Euro -- which has far-reaching implications for the stock market -- could be the next shoe to drop.

Reflecting this possibility, he sees the U.S. stock market poised for a "massive selloff" centering around the Euro -- the kind, he believes, that could send the Dow (currently hovering around 10,100) skidding to 5,500 to 6,000 by year end.

In brief, Markowski sees the Euro -- which has been slammed by brisk selling pressure because of Greece's debt woes -- vulnerable to even greater downside, say another 30% to 40% before year-end, because of Europe's swelling financial difficulties.

In early December, it cost $1.51 of American money to buy a Euro. Now, only about $1.35 of U.S. currency is required to buy a Euro. By year end, Markowski calculates, the exchange rate should be around one to one.

What's more, he figures it's likely the value of the Euro will stay down for several years because that's the only way Europe can ensure constant demand for its goods.

"The shine is off the Euro," says Markowski. "The talk that it may someday replace the dollar is now dead," he adds, citing investors' mounting concerns about the spreading sovereign debt problems of the PIIGS (Portugal, Ireland, Italy, Greece and Spain), which precipitated about a 10% decline against the dollar since late November.

What about the European Union's efforts to bail out the troubled countries, notably Greece? Couldn't that help stem the Euro's decay?

Markowski is skeptical. Noting that leading European nations such as Germany and France are scrambling, he calculates they will likely find a way to solve the debt woes of Greece, which is arguably the weakest of the PIIGS. The global equity markets and the Euro will likely mount a short term recovery rally on an announced solution, he says, but the damage to Euro has already been done.

The debt solvency problem of the PIIGS, he insists, is just the tip of the iceberg. Greece's debt solvency crisis, he says, has exposed the real problem the PIIGS are facing, namely overbloated budget deficits due to a high percentage of people being employed by their governments and extremely high unemployment rates. Spain's unemployment rate is 17% and is expected to rise to 22% by year end.

As Markowski sees it, the PIIGS will have great difficulties in covering their operating deficits, as well as the pension payments to those baby boomers in Europe who have or are retiring. Further, required belt tightening by the PIIGS is likely to cause social unrest and a political backlash in Europe, and in a worst case situation, could threaten the utilization of the Euro as a currency.

In any event, even assuming a best case scenario, Markowski believes the Euro could fall to new all-time multi-year lows, versus the dollar, between now and the end of 2011.

Milton Friedman, the Nobel prize-winning forecast who died in November, also expressed reservations about the viability of the Euro, observing the currency would not be able to make it through a recession, Right now, Europe is in the throes of a nasty recession.

A falling Euro, which leads to a spike in the U.S. dollar, means higher prices for our goods overseas and less foreign demand for them. That, of course, would negatively impact the profits of U.S. companies with overseas operations, in effect further slowing our economy. At present, the S&P 500 companies realize nearly 50% of their business from overseas operations.

It's worth noting, too, that a sliding Euro, versus the greenback, has ominous implications for the U.S. stock market. Markowski points out that the Euro's steep decline, versus the dollar, in the late summer of 2008 and winter of 2009, led to the crashes in the U.S. stock market, which occurred in the fall of 2008 and the spring of 2009, respectively. He notes that even the bursting of the bubble in April of 2000 and the ensuing economic downturn in the U.S. can be blamed on a steep 15% tumble, which began in early 2000.

Looking at industries that could be most negatively impacted by a lower Euro -- in terms of negative or declining cash flow -- Markowsi singled out three, which rank at the bottom of 230 industries he has checked. They are aluminum, notably Alcoa, petroleum refining, particularly Valero Energy, and big oil companies, namely Chevron.

By the same token, he points out, there are industry beneficiaries of a falling Euro. In particular, he cites airlines, which would benefit from lower jet fuel costs and cheaper foreign travel. Here, he singles out Pinnacle Airlines.

The bottom line: Don't be an Emperor Nero and fiddle while the falling Euro burns the markets.

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