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ETF Periscope: Butch Bernanke and the Jackson Hole-in-the-Wall Gang

Posted on the 22 August 2011 by Phil's Stock World @philstockworld

ETF Periscope: Butch Bernanke and the Jackson Hole-in-the-Wall Gang

“In skating over thin ice our safety is in our speed.” — Ralph Waldo Emerson

ETF Periscope: Butch Bernanke and the Jackson Hole-in-the-Wall Gang
There’s a great line in that wonderful revisionist Western, “Butch Cassidy and the Sundance Kid.”  When Butch comes up with yet another of his questionable ideas for pulling off their next heist, the Kid replies, “You just keep thinkin’, Butch. That’s what you’re good at.”

Well, at the end of this week, we’ll all get to hear what Fed Chairman Ben Bernanke has been thinking about lately.

Whether it’s any good the markets well decide, with little lag time between his pronouncement and the verdict issued out of the court of opinion known as Wall Street.

The occasion for the scheduled speech is the annual conference of central bankers at Jackson Hole, Wyoming, organized by the Kansas City Fed. Last year, Bernanke gave notice that he was ready to throw in everything, including the kitchen sink, in order to move the economy forward with an assortment of stimulus mechanisms. Wall Street liked what it heard, and so began a 30% uptrend in the markets that continued over a number of months.

In spite of recent rumblings out of the Fed that there will not be another round of quantitative easing, it’s hard to believe that, in the current state of the markets, some form of “QE3” won’t be bandied about.

The problem is, what do you have left after you have already given everything you’ve got, including the kitchen sink? What happens if Butch Bernanke pulls out his six-shooters and fires away, only to find that the rubes in the audience realize he’s only firing blanks?

The equity market needs a reason to believe. In spite of several recent huge up days on Wall Street, the number of massive down days these last two weeks are the real story.

For the fourth straight week, stocks have dropped steeply. The Dow Jones Industrial Average (DJIA) lost 4% on the week. The benchmark S&P 500 Index (SPX) did even worse, losing 4.7%. Not to be outdone, the NASDAQ Composite (COMP) lost a staggering 6.6%.

As of Friday, the Dow was off over 2000 points from its 2011 highs, a 16% drop. While it hasn’t yet reached the 20% level where a correction is considered to have turned into an “official” Bear market, it doesn’t seem that sour note is out of range, at least not as things stand at the moment.

Among the limited strong performers for the week were the VIX, and a number of leveraged inverse Bearish ETFs.

The VIX, which is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, consists of a wide range of S&P 500 index options, and is rarely mentioned without being noted that it is commonly referred to as the “investor fear gauge.”  (When the VIX goes up, it indicates uncertainty, usually accompanied by a drop in the equity markets. Inversely, when the VIX goes down, the Dow tends to trend up.) The VIX was up over 20% for the week.

As well, there was an assortment of leveraged, inverse ETFs that saw nice returns this week, including SDS (UltraShort S&P500 ETF), which tracks the S&P 500 Index. SDS seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the S&P500 Index. It rose over 12% over the week’s five sessions.

Another impressive performer was TZA (Daily Small Cap Bear 3x Shares ETF), which tracks the Russell 2000 Index (-300%). It measures the performance of the small-cap segment of the U.S. equity universe and is comprised of the smallest 2000 companies in the Russell 3000 Index, representing approximately 10% of the total market capitalization of that Index. TZA was up around 20% on the week.

Bernanke and company may feel compelled to break the current mode of fear on Wall Street. It wouldn’t be a bad idea to try, though it remains a large question mark as to what exactly he can do at this point. Interest levels have already been promised to remain, over the next two years, as close to zero as you can get without going negative. Buying more government debt? True, it’s been the cocktail of choice for the Feds recent stimulus actions, but how effective will that be at this point?

Before the Jackson Hole-in the-Wall Gang ever gets a chance to strut its stuff, the main news this week will likely emanate from Europe, where a much heralded meeting between Germany’s Merkel and France’s Sarkozy produced nothing of significance, leaving the disappointed European bourses deep in the red.

Ben might take note that big expectations often give way to big disappointments.

Bernanke has famously proclaimed that he is a student of the history of the Great Depression, and that he didn’t want to make the same mistakes this time. The problem is, making a new series of mistakes is not necessarily going to pull the economy and financial markets out of its current tailspin. The Fed Head might not offer much of anything out of Jackson Hole, if for no other reason that if he does make promises now and the markets don’t respond, what then? If he promises nothing specific, at least there will remain the perception that he might still have a round or two to fire if things really get shaky.

It kind of leaves you thinking about another great line from the Butch Cassidy film. At one point, Butch’s girlfriend asks: “Do you know what you’re doing?”

Butch’s response is classic: “Theoretically.”

Hopefully, if anything does get proposed from the Jackson Hole-in-the-Wall Gang on Friday, it will turn out to have practical applications, as opposed to just being a professor’s theories.

ETF Periscope

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

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