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ETF Periscope: Are PIIGS About to Get Poked On the Street?

Posted on the 13 June 2011 by Phil's Stock World @philstockworld

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Courtesy of Daniel Sckolnik, ETF Periscope

“I went to a bookstore and asked the saleswoman, “Where’s the self-help section?” She said if she told me, it would defeat the purpose.” –  George Carlin

ETF Periscope:  Are PIIGS About to Get Poked On the Street?
Was that a loud squeal that was just heard down at Wall Street?

The European Union is performing quite a balancing act these days, spinning numerous plates high in the air atop thin wooden poles with all the deftness of an ambidextrous circus performer. However, investors may be starting to wonder not if the plates will fall and smash, but precisely when it will occur.

The PIIGS (Portugal, Italy, Ireland, Greece and Spain) may be getting too wild to remain corralled much longer. And though hardly the sole reason that gravity seems to be finally catching up with the markets, the lurking debt problem that permeates much of the EU is beginning to feel like a large factor in a fast growing storm.

The Dow Jones Industrial Average (DJIA) found itself below the 12,000 level once again, but this time it was the first time since March that it ended the week at that level. And for those who keep track of such things, the Dow is on a reverse winning streak, having posted losing weekly numbers for the sixth straight week. Not to worry though, because the equity markets remain on a Bullish tear, right? Well, not really. The S&P 500 Index (SPX) is right about at the same point it started the year, and is currently 9% off its annual highs.

As for the EU situation? It’s complicated. Maybe more complicated than many are willing too admit.

After bailing out the Greek government to the tune of over $150 billion last year, it has become painfully obvious to both the European Union and the International Monetary Fund (IMF) that a new deal needs to be struck, as the original conditions of the bailout are no longer tenable, if they ever really were.

However, there are some serious hitches to finding a solution. 

One of them is that Germany, which has the most solid economy among EU members, appears to be getting tired of carrying the load of the weaker members. The relationship, however, may be a classic one of co-dependence. It may be impossible to break off, at least not without serious damage to all concerned.

So, even though the German Finance Minister sent a letter to the International Monetary Fund (IMF) as well as many key EU officials, including the European Central Bank (ECB) president, insisting that absolutely no new “agreement” (meaning, of course, no more bailout money) would be possible unless more burden-sharing between taxpayers and investors occurs — in spite of the fact that Greece could become the first bankruptcy in the Euro zone — the fact is that nobody really may have the power to avert a major financial meltdown.

The reason? The Euro banks can throw untold billions more towards the sovereign debt crisis, but it simply may not be enough. The conditions that are required by the lenders — austerity measures and fire sale pricing of government assets — may simply be untenable to the folks that actually live in the country. General strikes are a powerful tool, and the Greek electorate has used it before to good effect. Rather than undertake any more austerity measures that are being “suggested” to them by EU’s bankers, the citizens of Greece may simply shrug and say, so what? When people get boxed in, they start thinking outside the box.

Greece is a pretty old culture. Maybe they figure they don’t really need the EU, at least not at the cost of suffering certain draconian conditions, rightly disserved or not.

Ultimately, it will be up to Greece’s citizenry to decide what conditions they want to agree to, no matter what their political leaders urge. And if Greece should default, it isn’t much of a stretch to think that the other debt-ridden countries, especially Portugal, Ireland, and Spain, will be at the very least paying very close attention to what the repercussions are.

The problem is, once again, nobody really knows. The fact is, of course, nobody really wants to find out.

However, a point may have been reached where a skittish Wall Street is starting to get nervous about whether a solid and fast resolution shall be achieved.

Not because the EU crisis is the only crisis around.

But because there are so many at the moment.

And Wall Street, never allowing loyalty to get in the way of a good profit, may start to bet en masse on the EU ship going south. Shorting opportunities on EU’s financial crisis are virtually unlimited, and, as we’ve seen back in the spring of 2010, they can become a prevailing wind that keeps blowing.

In concert with a number of other negative economic situations, including China’s over-expanded economy and our own stagnant recovery, the recent Bull market may have finally charged itself out, and the Bears may move to the forefront of Wall Street for a while.

ETF Periscope

Full disclosure:  The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.

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