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ETF Periscope: Are PIIGS About to Get Poked On the Street? (The Sequel)

Posted on the 20 June 2011 by Phil's Stock World @philstockworld

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Courtesy of Daniel Sckolnik, ETF Periscope

“There are only 3 colors, 10 digits, and 7 notes; it’s what we do with them that’s important.” –   Jim Rohn

ETF Periscope:  Are PIIGS About to Get Poked On the Street? (The Sequel)
Take a deep breath, everybody. Really, no need to worry. Just disregard all the commotion you may have noticed these last couple of months. We’ve got everything under control.

That seems to be the message the EU leaders are trying to send in a valiant effort to calm the markets, even if their motives might be considered a little on the self-serving side of things.

However, that message may have helped contribute to ending the recent string of six losing weeks in the U.S. equity markets, but not by much. The Dow Jones Industrial Average (DJIA) did manage to end above the 12,000 level, but only by a hair. That places it over 500 points lower than just three weeks ago.

Perhaps of more concern, as it is more representative of the broader equity market, is the fact that the S&P 500 Index (SPX) bounced off its 200-day moving average last week, the first time that has happened this year. The 200-day MA frequently provides robust support, but can also offer substantial resistance once breached to the downside.

So is the message indeed a valid one? As one of Europe’s most noted sons once wrote: “That is the question.”  

After seven weeks of fast-rising concern that Greece is about to default on its debt, substantially contributing to the longest losing streak on Wall Street in almost two years, the powers that be decided that shuffling the players atop the Greek government should serve as adequate balm to soothe the fears of investors on both sides of the Atlantic.

In a deep bow to the European Central Bank (ECB) and the International Monetary Fund (IMF), Greek’s prime minister appointed a new finance minister. This is the first step apparently required for Greece to make a new deal with the ECB directly and the IMF indirectly. New deal, more bailout money. More bailout money, no default. No default, no bankruptcy by one of the EU’s original members.

The EU lives on. All is well.

Except, is it really?

After all, what has changed? Has Greece’s financial situation really changed? Have the systemic problems that contributed mightily to its debt woes really changed?


Then what is really going on here? Is this anything more than the can being kicked farther down the road? And if that is what’s going on, to who’s to benefit?

Maybe to the U.S. banks, who are carrying a hefty load of Greece’s debt to the tune of over $40 billion as of the end of 2010? Maybe to the ECB, who may need more time to adjust its portfolio as the appetite for Greece’s near junk-level bonds dissipates rapidly? Obviously to all EU proponents in general, who have a monster stake in somehow keeping things as close to the status quo as possible.

Last year’s version of the same debt crisis did manage to get addressed, via the aid of a $150 billion bailout from the ECB and the IMF. However, as the same deep issue continues to surface among all the PIIGS (Portugal, Italy, Ireland, Greece and Spain), one can only wonder if the current fix to the problem accomplishes anything more than postponing the inevitable default.

It may be a version of musical chairs, the child’s game where everyone moves around chairs until the music stops, then everyone grabs for a seat. Only there are never enough chairs. Those left standing lose the game. Investors should continue to ask themselves if they want to be the ones left standing, holding a handful of sour bets, when the last notes are played.

What the Periscope Sees

Here are some ETFs that can be used to position your portfolio should the EU debt crisis shift into overdrive.  Consider using these ETFs as a hedge for your portfolio if your overall position remains currently Bullish.

VGK (Vanguard European ETF) consistently reflects the pulse of the EU. It tracks the MSCI Europe Index, made up of the common stocks from 16 European countries. You could short this ETF, or purchase slightly out-of-the-money puts no closer than a few months out.

A second ETF trade is FXE (Rydex Currency Shares Euro Currency Trust). FXE tracks the euro.  It measures the relative value of the U.S. dollar against the euro. It may even be the purer play of the two, as currencies can be more reactive than stocks. Again, short the ETF or purchase puts.

Not a fan of shorting or using options? There is an alternative.

As the dollar will no doubt strengthen should the euro fall, you could purchase UUP (PowerShares DB USD Index Bullish Fund). This tracks the Deutche Bank Long US Dollar Index. The USDX futures contract attempts to replicate the performance of being long the US Dollar against the following currencies: Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona, and Swiss Franc.  While this is something of a hedged currency bet, as opposed to playing a straight dollar/euro ETF, it has proven historically to benefit as the euro goes down.

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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