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ETF Periscope: Fed Unlikely to Go Bold, Content to Leave Drama to the Greeks

Posted on the 13 March 2012 by Phil's Stock World @philstockworld

“The fear of death follows from the fear of life. A man who lives fully is prepared to die at any time. — Mark Twain

ETF Periscope: Fed Unlikely to Go Bold, Content to Leave Drama to the Greeks
Wall Street will once again look towards the Fed for signs of a promise, no matter how vague, of QE3. And, like a Rorschach test, investors will pretty much interpret Tuesday’s scheduled statement from the Federal Open Market Committee (FOMC) in a way that matches their own expectations.

In lieu of any clear and bold pronouncement, the FOMC will likely play coy, expressing general content with the current direction of the market, thereby indicating that nothing of note needs to be changed, and that the current level of growth is acceptable.

It would be highly unusual for the Fed to effectively contradict itself, and Ben Bernanke has already staked out his position last month, during the course of his testimony on Capital Hill.  While there, he shared his stony visage with the members of the House Financial Services Committee, gracing their presence with his reasoning on why an additional round of more-or-less free money is not really required at this time.

So far this year, the majority of domestic labor reports has mainly supported the growth paradigm and in turn would seem to support Bernanke.

It was not too long ago that economists thought that the Fed had run out of arrows in its quiver, and the expectations by investors that they are even considering pulling the trigger on additional quantitative easing would seem to reveal a large shift in sentiment towards the ability of the Fed to impact the domestic economy in a positive way.

There is, of course, another factor that could change the dynamic created by the Fed, no matter what it might prove to be. That, of course, is the small matter of the Eurozone.

Both Wall Street and the European bourses seem to have bought into the whole story that Greece is on the mend simply by virtue of having secured enough funds to pay its March credit bill. With an adequate number of private bondholders having just agreed to take a communal “haircut” of 53%, the Greek government has managed to knock off a sweet 105 billion in euros from its outstanding debt. This action now provides Greece with restricted access to 130 billion euros in new loans, based upon the most recent deal cut between Athens and the Eurozone leaders.

The problem is that additional conditions imposed upon the Greeks are likely to go unfulfilled. The notion that the Greek citizenry will subject itself to a further round of austerity measures seems almost nonsensical. And with national elections just around the corner, there is no shortage of politicians willing to give voice to a country already in a certified recession. If the elections bring in a wave of new leaders who won’t agree to continue the harsh conditions required of the current deals, then the possibility of a default by Greece will once again rear its ugly head, like a Hydra right out of Greek mythology.

Of course, the Fed may say all the right things, and the Dow Jones Industrial Average (DJIA) might shoot up past the 13,000 mark, the S&P 500 Index (SPX) past 1,400, and the Nasdaq Composite Average (COMP) past 3,000. In such a scenario, the Eurozone could continue to play its very recent role of second fiddle to a more positive market sentiment, and the Bulls could keep the current trend intact.

So, say it’s QE3, please, FOMC.

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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