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ETF Periscope: Wall Street Looks to the Fed for Shelter From Eurozone Reverberations
“Humor is laughing at what you haven't got when you ought to have it.“ -- Langston Hughes
With the Dow Jones Industrial Average (DJIA) dropping by more than 1000 points in just over 30 days, it might be hard for Wall Street to find a lot to be optimistic about. But that certainly won’t stop it from trying, and to that end investors will be paying even closer attention than usual to the words out of the mouth of Fed-head Ben Bernanke.
This week, investors will attempt to find comforting hints of a new round of quantitative easing from the Federal Reserve, and there will be ample opportunities to parse that possibility. Bernanke makes an appearance before Congress later in the week, and, as that event shall coincide with the closely tracked report from the Labor Department on job numbers, there is the strong chance that Thursday could prove to be a market-moving day.
In addition to the Federal Reserve chief doing some explaining to the Joint Economic Committee, his second in command, Vice Chair Janet Yellen will probably float a trial balloon of sorts on Wednesday, when she delivers a talk on the nations economic outlook. This, of course, will give Bernanke a chance to embellish or walk-back anything that was said by Yellen and may have been misunderstood by hypersensitive investors.
And for those who can never get enough of the Fed, the regional economic report known as the Beige Book will become available on Wednesday as well.
As recently as two months ago, the likelihood of any new stimulus action initiated by the Fed seemed a stretch, as the domestic economic picture appeared to be one of recovery, and the market had just finished a nice first quarter run-up. Now, however, the worm appears to have turned, with the Eurozone debt crisis worsening rather than improving, and U.S. growth appearing less robust than advertised.
The question is, would even a subtle hint of QE3 placate investor concern that the Eurozone’s problems are not yet baked in to the current price levels of the equity markets both here and abroad?
The simple answer is a strongly conditional “yes.”
That affirmation comes with a very strong catch, meaning that a clear signal would be required from key European leaders that a concerted effort was in the works. That could be extremely problematic for the reason that, with so many factors in the mix, making a truly unified effort might be out of reach. The Eurozone is like a dysfunctional family, whose good intentions, when they do manage to emerge, are simply not strong enough to overcome a heavy level of inertia.
There are elections coming up in both Greece and Spain, with voters deciding, essentially, if they want to honor past debt commitments. There are power struggles within the Eurozone, with Germany attempting to balance its own domestic sentiments with the increasing need of its southern neighbors to feed their growing debt obligations. And, to a large degree, there is the structure of the Eurozone itself, which has certain limits to what it can do to address both fiscal and economic issues, since it primarily was formed as a trade union.
The bottom line? The genie is out of the bottle, and even the best intentions, at this point, which might include a version of shared debt in the form of Eurobonds, may simply be too slow and too inefficient to hold the Eurozone together in its current alignment.
However, with an announcement of some sort of concerted effort from out of the Fed, the International Monetary Fund, and the European Central Bank, investors might just find reason to believe.
Anything short of that, and investors should seriously consider shorting the market in general, at least for the short term.
As a reminder, The MacroReport is Sabrient’s newest product for the investment professional. This is a monthly co-publication of Sabrient Systems and MacroRisk Analytics, providing an in-depth analysis of the macroeconomic trends in focus territories around the world and their impact on the U.S. economy, along with actionable ideas (U.S. stocks and ETFs) intended to capitalize on a given outcome. Complimentary access is available on our web site through MacroReport InterActive. The inaugural March issue focused on Greece. The current issue focuses on China. The next issue, slated to be released next week, will look at oil prices and the global issues that impact it.
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.