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ETF Periscope: Greece is Still the Word

Posted on the 19 September 2011 by Phil's Stock World @philstockworld

Courtesy of Daniel Sckolnik, ETF Periscope

ETF Periscope: Greece is Still the Word

“Do you want to know who you are? Don’t ask. Act! Action will delineate and define you.”  — Thomas Jefferson

ETF Periscope: Greece is Still the Word
Wall Street charged hard last week, putting aside its recent fears and skittishness as it ran off a string of five successive winning sessions. But is this new-found round of optimism really warranted, or is it really just another case of ostrich-like, head-in-the-sand behavior?

The U.S. stock market just finished its second-best week in a year, rattling off an impressive run of positive numbers. For the week, the Dow Jones Industrial Average (DJIA) went up 4.7%; the S&P 500 Index (SPX) rose 5.4%; and the Nasdaq (COMP) tacked on an impressive 6.3%.

These are undeniably strong numbers, but it’s always of value to keep things in perspective. The Dow’s 500-point run-up last week left it no higher than it was six weeks back. It remains more than 10% off its 2011 highs. The same 500-point rise mirrors a similar push at the end of August, and those gains got swiftly wiped out even faster than they occurred.

The cause of that downward dive has not gone away. It has simply received a soothing band-aid, which sadly will not heal the wound.

The band-aid was a phone call between two of the EU’s heavy hitters. The wound is the European Union’s sovereign debt crisis.

Last year, the realization that Greece needed a massive bailout to avoid slipping into default hit the world equity markets hard. However, once the EU and the International Monetary Fund (IMF) made a loan of $150 billion, the market’s ruffled feathers eventually got soothed, and, as always, with its short attention span, Wall Street began to shift gears, preparing for what eventually became an 11-month uptrend, culminating with the 2011 high of over 12,750 for the Dow.

As for investor concerns over EU’s sovereign debt crisis at that time? Well, there’s a popular t-shirt that reads “I don’t have A.D.D., it’s just that . . . ooh, look, a bunny!”

In terms of Wall Street’s attention span regarding the EU, the t-shirt seems to say it all.

But the facts haven’t changed, and Greece is still the word.

The fear of the EU sovereign debt crisis was certainly one of the main culprits in the recent dive in the major indexes. The word “contagion,” together with the phrase “domino effect,” has been bandied around with astonishing frequency by the financial media over the last two months.

Then, early last week, when volatility, as measured by the VIX and commonly referred to as the “fear gauge,” was hovering at levels similar to those leading up to the crash of ’08, rumors suddenly surfaced that China was going to be a robust buyer of Italian debt. In response, spooked investors suddenly got a little braver and began to wade back into the market.

A few days later, there was “that phone call,” an emergency conference call between France’s Nicolas Sarkozy and Germany’s Angela Merkel. The gist of the communication seemed to be that the two EU powerhouses were in accord, and they announced in tandem their solidarity in maintaining the EU and the single currency.

That was it. No solutions. Not even any promises. Just reassurances that everything was OK.

Both the European bourses, followed by Wall Street, seemed satisfied by the gesture. What started out as a pretty good week for the equity markets turned into a mini-Bull Run.

However, the systemic economic problems of Greece hardly have been solved. The latest promise by the European Central Bank to provide yet another multi-billion dollar bailout is not a solution.

It is simply another Band-Aid. An expensive one, but one nonetheless.

A similar problem remains, to different degrees, for the other countries that comprise the PIIGS (Portugal, Ireland, Italy, Greece and Spain). There is simply too much debt for the countries to repay, and unless some new and innovative solution emerges, the euro may be headed for oblivion. The solution of Euro Bonds has been offered up, and might even be the one with the highest chance of success. However, politically speaking, it seems the more solvent countries will balk, no matter what fixes are proposed.

Currently, with no practical solution being offered, aside from warm words of good intentions by Merkel and Sarkoz, then a default by Greece and, subsequently, by other EU members, may be leaning towards the inevitable side.

So  while the effects of a possible default by Greece seem to have been successfully postponed, the fact that the underlying crisis has not been fixed cannot be ignored.

For Wall Street, next week’s Fed meeting could give investors are jolt of optimism, provided some treat is offered by Bernanke. If so, the markets should trend up, and once again push the EU crisis to the back burner for the time being.

However, for those who don’t subscribe to band-aids as being much of a cure, Greece is still the word, and any upward moves in the market could be viewed as opportunities to short the looming EU crisis in one fashion or another.

What the Periscope Sees

Here are two ETF trade ideas that could become highly profitable if and when the EU proceeds to unravel. For leverage, consider using options and, if so, going out 3 – 6 months might be prudent.

The first ETF is VGK (Vanguard European ETF), which tracks the MSCI Europe Index, made up of the common stocks from 16 European countries. You’d want to short the ETF to benefit from a EU crisis. Buying puts offers a second workable strategy.

The second ETF is FXE (Rydex Currency Shares Euro Currency Trust). FXE tracks the euro and measures the relative value of the U.S. dollar against the euro. Again, short the ETF or consider the purchase of puts.

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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