“A man who carries a cat by the tail learns something he can learn in no other way.” — Mark Twain
More stimulus for the eurozone is likely in the cards at some point in the near future, as the European Central Bank (ECB) ponders its options in addressing the region’s highest unemployment rate since the euro was established nearly fourteen years ago.
In what should be regarded as the leading indicator of the eurozone’s fragile economic condition, the region is now experiencing a record high unemployment level of 11.7 percent. According to Eurostat, which serves as the European Union’s statistical office, there are almost 19 million unemployed citizens of the 17-member euro single currency area.
A disproportionate percent of those out of work can be found amongst the PIIGS (Portugal, Ireland, Italy, Greece and Spain), with Spain and Greece leading the way, hitting the ominous levels of 25%. But what the leaders of the region need to really be placing their collective attention on is the youth unemployment numbers, where over 50% of those under 25 can’t find work. Unless that potential labor pool is incorporated one way or another into any plans for elevating the region out of its second bout with recession in the last four years, it is likely that those plans are flawed.
So what are the options, at least in the short term?
The ECB’s tool of choice at this point may be a straightforward rate cut, an action that falls squarely inside its mandate as opposed to its more recent unconventional proposals, such as the bond-repurchasing mechanism known as the Outright Monetary Transactions (OMT).
One of the reasons that a rate cut is appropriate is that the rate of inflation for the rurozone is now hitting the ECB’s projected target of around 2%. This should embolden the bank’s president Mario Draghi to cut its rate below the already record low of 0.75 percent, perhaps as soon as the first quarter of 2013. With both the International Monetary Fund (IMF) and the EU projecting that the region will remain in recession during that timeframe, Draghi has a lot of latitude to make the move.
Whether or not it will suffice to impact the unemployment rates is arguable, but any stimulus at this point for the eurozone must be regarded as a good thing.
The viewpoint that new stimulus might be required, as opposed to the seemingly endless stream of austerity measures, is finally gaining traction. Both the IMF and the European Commission have changed their position and are now advocating for ways to stimulate the region’s moribund economy, even though they are phrasing it in terms that allow for certain budgetary restraints to remain in place.
So the stimulus-over-austerity debate may finally be shifting towards the stimulus side of the equation. The real question now is whether this paradigm shift is occurring too late to keep the eurozone, along with the greater EU, from collapsing into a deeper recession.
What the Periscope Sees
This week finds technology sitting atop the Sabrient SectorCast ETF Rankings, which ranks each of the ten U.S. industrial sector iShares (ETFs) by Sabrient’s proprietary Outlook Score.
But which ETFs are the best to ride this particular trend? Well, going with the proven performers on the year so far would be one reasonably prudent approach. Here is a list of some of the top performing technology ETFs, along with their year-to-date returns as of the last week in November.
FDN — First Trust Dow Jones Internet Index +17.96%
XLK — Technology Select Sector SPDR Fund +14.46%
IXN --iShares S&P Global Technology Sector Index Fund +14.07%
IGV — iShares S&P GSTI Software Index Fund +13.86%
VGT — Vanguard Information Technology Index Fund +13.61%
If you are considering options on the ETFs in lieu of the ETFs themselves, slightly out-of-the-money calls on March expiration contracts can be considered.
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.
