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Let Sleeping PIIGS Lie
by Daniel Sckolnik of ETF Periscope
“If to do were as easy as to know what were good to do, chapels had been churches, and poor men’s cottages princes’ palaces.” ~ William Shakespeare
In case you haven’t been paying attention, the recession is apparently over. At least that’s what has been offered up and bandied about over the course of the last few weeks by a long line of economists and financial pundits who are hopping aboard the “coast is clear” bandwagon.
But are you buying what they’re selling?
Looking at the broad-based market activity over the course of September, a case can certainly be made that things are looking up, at least in terms of Wall Street, though Main Street undeniably remains something of a laggard, in terms of both near double-digit unemployment levels and a stubbornly negative housing market.
The Dow Jones Industrial Average (DJIA) powered to a 7.7% gain last month, the Dow’s best September performance in over 70 years. The S&P 500 Index (SPX) also had its best performance since 1939, gaining 8.8% for the month. The Nasdaq (COMP) had an even more impressive run up for September, up a whopping 12%, easily its best month since some of the dot.com insanity days back in the late ‘90’s. Gold? Bursting above and beyond its all time highs. Crude oil? Seems to be on track for one of those strong and steady uptrends that leaves investors scratching their heads, wondering how they missed out on that commodity yet again.
Another development that has unfolded over the last week may also point to a general strengthening of the markets, at least in terms of the macro scheme of things. A pair of recent news stories emerged out of Europe, and what didn’t occur may prove to be more revealing than what did occur.
First, the investor ratings service Moody’s downgraded Spain’s sovereign debt a notch down to Aa1. Moody’s cited weak economic growth factors, an unemployment rate over 20% and high levels of debt. It warned that weaker than expected growth or a worsening in the debt situation could trigger a negative outlook by the agency. On the same day, the Central Bank of Ireland announced that the cost of bailing out its Anglo Irish Bank could top out at over $46 billion dollars. The bank suffered huge losses over the course of the last year, primarily due to a collapse in the country’s housing and construction sectors.
That’s what happened.
So what was it that didn’t happen?
Well, the European markets momentarily shuddered and fretted, but quickly shook it off and moved up from the earlier lows. The U.S. markets were also generally unaffected by the Euro news, being more focused on the weekly reports out of Washington and the Reuters/ University of Michigan survey of consumer sentiment. Those reports were by and large regarded by Wall Street to be pretty much as expected, leaving the Dow down for the week, but not by much.
It may be worth recalling that a scant 5 or 6 months ago, during the heart of the sovereign debt crisis that unfolded in Europe, any new negative news from the area’s Central Banks would drop the markets like a strong uppercut to the jaw of a dazed boxer. The 700-billion-dollar backstop offered up by a consortium of the US, IMF and European Union members, however, has apparently worked, at least for the time being.
So if slightly bad news squeals out of the mouth of PIIGS (Portugal, Italy, Ireland, Greece and Spain), and no one seems to find the noise offensive, could it be a fortuitous time to take a closer look at this financial sector of Europe and consider a buying opportunity or two?
If you find yourself so inclined to pursue some of the weaker economic brethren of the European zone, here are a few ETFs that could fulfill the purpose: iShares MSCI Spain Index (EWP), down almost 15% YTD; iShares MSCI Italy Index (EWI), down about 14% YTD; and iShares MSCI Ireland Capped Investment Market Index (EIRL), down over 5% YTD.
The Year–To-Date results are hardly inspiring, but the premise here is that there is room to the upside, if indeed the PIIGS, or at least some of them, are cleaning up their fiscal act.
If you want to hedge some of the risk of your PIIGS trade, you may consider adding the relative strength of the regions economic powerhouse, Germany, to the mix, in the form of iShares MSCI Germany ETF (EWG). A reasonably decent pairs trade might be created out of a combination of one or more of the PIIGS index ETFs with the German index ETF.
If you are feeling a bit contrarian, you can of course short these same ETFs, or purchase some puts in anticipation of a coming wave of Euro zone downside action.
As always, dig deeper, do a little homework, see what fits your virtual portfolio, and if you end up taking action, feel confident that you went into it with your eyes open.
And open eyes are essential if you decide not to let these sleeping PIIGS lie.
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.
