Daily “Ways-to-Play” The News Before the Moves 3/24/2010

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Germany Europe’s engine

Why Germany needs to change, both for its own sake and for others
ETFDesk users see this as a potential opportunity to: buy iShares MSCI-Germany (EWG);

Check out how others are using ETFs to capitalize on this news or add your own opinion

How America Now Shops: Dollar Stores, Online Retailers (Watch out, Walmart)

Consumers may be emerging from the Great Recession a little more willing to spend these days, but they’re still incredibly price-conscious and making smaller, more frequent purchases rather than loading up on costlier bulk goods.
ETFDesk users see this as a potential opportunity to: buy SPDR-Consumer Staples (XLP)

sell SPDR S&P Retail ETF (XRT);

Check out how others are using ETFs to capitalize on this news or add your own opinion

How Much for a Drink of Water?

Conserving fresh water is becoming increasingly important around the globe, a new report from the World Bank’s internal evaluation group says, so the World Bank should encourage countries to charge for water.
ETFDesk users see this as a potential opportunity to: buy PowerShares Water Resource Portfolio (PHO)

buy Claymore S&P Global Water Index ETF (CGW)

buyPowerShares Global Water Portfolio (PIO);

Check out how others are using ETFs to capitalize on this news or add your own opinion

Why John Mauldin Is Worried About A 40% Market Decline

Son of Texas and financial seer, John Mauldin, believes the stock market could shed 40% in the near future (SPX). John is the president of Millennium Wave Advisors, LLC, a Dallas, Texas based investment advisor, with $600 million in assets under management. John worries that the velocity of money, an indicator of how many times a dollar is reused in the economy, is collapsing. This ratio, which is defined by the GDP divided by the money supply, bottomed at 1.15 in 1946. It peaked
ETFDesk users see this as a potential opportunity to: buy UltraShort S&P 500 ProShares (SDS)

sell S&P 500 SPDR (SPY)

sell Rydex Euro Currency Trust (FXE)

buyiShares MSCI-Emerging Markets (EEM)

buy UltraShort Lehman 20+ Year Treasury ProShares (TBT)

buy Ultra ProShort S&P500 ProShares (SPXU);

Check out how others are using ETFs to capitalize on this news or add your own opinion

Support for Nuclear Power Climbs to New High

Momentum gaining for Nuclear Energy in the US. According to GALLUP, support for Nuclear power is at an all time high.
ETFDesk users see this as a potential opportunity to: buy Market Vectors-Nuclear Energy ETF (NLR)

buy iShares S&P Global Nuclear Energy Index Fund (NUCL);

Check out how others are using ETFs to capitalize on this news or add your own opinion

China CEOs Join Obama in Supporting Yuan Appreciation

March 24 (Bloomberg) — Chinese executives are joining U.S. President Barack Obama in backing a stronger yuan, even as Premier Wen Jiabao says the currency isn’t undervalued.
ETFDesk users see this as a potential opportunity to: buy WisdomTree Dreyfus Chinese Yuan Fund (CYB)

buy Market Vectors Chinese Renminbi USD ETNs (CNY);

Check out how others are using ETFs to capitalize on this news or add your own opinion

Fitch Downgrades Portugal’s Debt

LONDON—Fitch Ratings on Wednesday lowered Portugal’s sovereign credit rating one notch to AA- and warned of further cuts unless the government changes is fiscal course.
ETFDesk users see this as a potential opportunity to: sell iShares MSCI-EMU (EZU)

sell iShares MSCI-Spain (EWP)

sell Rydex Euro Currency Trust (FXE)

buyProShares UltraShort Euro (EUO);

Check out how others are using ETFs to capitalize on this news or add your own opinion

European Bank’s PIGS Exposure

There is quite a lot of back and forth on just how important Greece is to the global financial situation. You have some commenting that if we are so concerned about Greece, why aren’t we freaking out about California, an economy with a larger deficit and a larger GDP (California’s economy is about the size of France). I can’t argue that California is definitely an issue, but at this moment, it certainly is not the focal point we should be looking at. While Greece by itself might very well be a containable problem, it represents a much larger problem. This chart might just help clear this up.

Source: Bloomberg

I did a back of the envelope calculation using the numbers from this graph, but I see about $1.3 trillion of PIGS sovereign debt in German, French, Swiss and British banks.  That is certainly a large exposure.  The issue is not just a Greek default, but if you’ve seen CDS spreads over the last 2 months, they have blown out considerably.  Remember all of those crappy fixed income assets that the World’s largest financial institutions were holding in late ’08 which almost crashed the system?  Well many of these governments implicitly or explicitly took over those assets.  And guess what all of those banks have been buying recently to juice up profits from a steep yield curve?  You got it, sovereign debt.  Its created sort of a perverse circular logic.  The Eurozone is worried about funding costs increases for many of its countries and is also concerned that its major banks will have to mark-to-market that $1.3 trillion worth of Sovereign debt.  While certainly any help to Greece may put a floor on “panic” in the short term, as you can see Spain and Ireland are much greater concerns for Europe’s big banks. 

It almost seems like 2008 replaying all over again, with a short term fix placating the market temporarily, but not fixing the larger issue still looming.  We all know how that ended…

It may seem wise in this context to use any relief rally in European banks to take exposure off the table or to build short positions.

Selling any exposure to IXG on strength might be a good call.   If you are interesting in building short positions the better play may be to just short individual names.

An interesting play might be pairing off shorts of European banks with an index like XLF or IYF which have exposure mostly to American domiciled banks.

Chart of the Day Feb 10 2010 – Debt Weight

Chart of the Day, Feb 4 2010

 

source : Olive Tree Securities, FT Alphaville

Daily “Ways-to-Play” The News Before the Moves 1/29/2010

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Investment Outlook Bill Gross | February 2010

“f all of the developed countries, three broad fixed-income observations stand out: 1) given enough liquidity and current yields I would prefer to invest money in Canada. Its conservative banks never did participate in the housing crisis and it moved toward and stayed closer to fiscal balance than any other country, 2) Germany is the safest, most liquid sovereign alternative, although its leadership and the EU’s potential stance toward bailouts of Greece and Ireland must be watche

buy iShares MSCI-Canada (EWC);

Check out how others are using ETFs to capitalize on this news or add your own opinion

Morgan Stanley (NYSE:MS): Bank of America (NYSE:BAC) May Be Hit Harder than Thought from Obama Trading Ban

The original report from Citibank (NYSE:C) in response to a proposal to limit proprietary trading from Obama was that Bank of America (NYSE:BAC) would lose about 1 to 2 percent of earnings from the event. Morgan Stanley (NYSE:MS) has now released a report stating that the fallout would be far worse than that, more than doubling their outlook over Citibank’s, to Bank of America losing potentially up to 5 percent of overall earnings if the plan is implemented.

sell iShares DJ US Financial Sector (IYF)

sell iShares DJ US Financial Services (IYG);

Check out how others are using ETFs to capitalize on this news or add your own opinion

DR. Copper, Market PHD – SELL!

It’s been said that copper (ETF: JJC) is the metal with a PhD due to its ability to reflect economic trends. What is copper saying right now?

buy UltraShort S&P 500 ProShares (SDS)

sell S&P 500 SPDR (SPY)

sell iPath Dow Jones-AIG Copper Total Return Sub-Index ETN (JJC)

buy Ultra ProShort S&P500 ProShares (SPXU);

Check out how others are using ETFs to capitalize on this news or add your own opinion

Could California Really Default?

After Standard & Poor’s downgraded California’s bond rating yet again earlier this month, Gov. Arnold Schwarzenegger and members of his administration sounded practically schizophrenic, on the one hand warning the legislature that the state had to get its fiscal house in order while simultaneously deriding the notion that California would ever fail to pay its obligations.

sell iShares S&P National Municipal Bond Fund (MUB);

Check out how others are using ETFs to capitalize on this news or add your own opinion

Hedging PIIGS Risk with ETFs

Acronyms for blocs of countries are all the rage these days: BRIC, MAVENS, now PIIGS (Portugal, Italy, Ireland, Greece, and Spain). As the BRICs and MAVENS were created to group strong growth countries into an investable group, the PIIGS are the polar opposite: countries on the brink of disaster. We didn’t coin the acronym “PIIGS”, but we are the first out with a comprehensive way to “play” it.

sell iShares MSCI-EMU (EZU)

sell iShares MSCI-Italy (EWI)

sell iShares MSCI-Spain (EWP)

sell Rydex Euro Currency Trust (FXE)

buy ProShares UltraShort Euro (EUO)

sell iShares S&P/Citigroup International Treasury Fund (IGOV)

sell Spain Fund (SNF)

sell The New Ireland Fund (IRL);

Check out how others are using ETFs to capitalize on this news or add your own opinion

Is Eurozone Dying?

Sovereign debt risk has been the talk of the town so far in 2010. Downgrades to Greece’s credit rating and its government bonds impact on the rest of Europe and its currency, the Euro, has sounded the alarm across the continent.

sell Rydex Euro Currency Trust (FXE)

buy ProShares UltraShort Euro (EUO);

Check out how others are using ETFs to capitalize on this news or add your own opinion

Is the Eurozone Dying?

Sovereign debt risk has been the talk of the town so far in 2010. Downgrades to Greece’s credit rating and its government bonds impact on the rest of Europe and its currency, the Euro, has sounded the alarm across the continent. It seems apparent by viewing the CDS and European bond market, that the PIIGS are being forced to quickly tighten fiscal policies. The question is, is this belt tightening happening too fast. The IMF has cautioned about paring back their stimulus programs too quickly, risking a a dip back into recession (see IMF Chief Cautions Against Early Stimulus Exit WSJ). It seems as if  the European continent is moving in two different directions, with several countries, and in particular, Greece, exhibiting dangerous weakness.  A German Economic Minister said, in a speech to parliament on Thursday,  that weak Euro countries may have a “fatal” impact on the rest of the Eurozone.  There are now rumors that France and Germany have already formulated a resuce plan for Greece.  Will Portugal and Spain follow Greece?  For now it seems pressure will remain on the Euro.  FXE looks like a good short and for those who want more  to ratchet up the leverage, consider EUO ProShares UltraShort Euro

Source: Bloomberg

Hedging PIIGS Risk

Acronyms for blocs of countries are all the rage these days: BRIC, MAVENS, now PIIGS (Portugal, Italy, Ireland, Greece, and Spain).  As the BRICs and MAVENS were created to group strong growth countries into an investable group, the PIIGS are the polar opposite: countries on the brink of disaster. We didn’t coin the acronym “PIIGS”, but we are the first out with a comprehensive way to “play” it.  Europe’s woes, particuarly those in Greece have been well documented, as debt ratios and budget deficits are climbing.  Sovereign risk is rising. Portugal just yesterday announced a budget deficit that was 9.3% of GDP vs. previous estimatesof 8%.  S&P and Moody’s have downgraded or slapped negative watches on Spain, Greece, Portugal debt in recent weeks with Moody’s going so far as to warn that Greece and Portugal’s economies may suffer a “slow death.”  The IMF is estimating that Italian public debt will reach 120% of GDP next year.  Ireland was forced to raise taxes and slash $3.6 billion government spending to help contain their annual budget deficit. In addition to a large budget decifit, Spain is battling the highest unemployment rate in Developed Europe and a Real Estate implosion worse than that of the United States.

The question now remains, how can investors hedge or speculate on PIIGS risk?  For those of you with contacts at Sovereign Debt CDS trading desks can easily buy protection on any of the PIIGS debt.  As the charts below show, this has been a profitable trade of late.  Simply amazing to us that PIIGS trade at wider spreads than BRICS.  Great charts from Credit Derivative Research

 

 source: Economist

 source: Credit Derivatives Research, Y-axis in basis points

The next best way to hedge/speculate on PIIGS risk other than the actual sovereign debt it probably the Euro.  Of course you can invest directly in the currency of use exchange traded products such as FXE – Rydex Euro Currency Trust or its two times leveraged sibling EUO  ProShares UltraShort Euro.  While a weak Euro should follow the fiscal troubles of its member countries, its likely not the most precise vehicle.  There are two broad based funds, IGOV iShares S&P/Citigroup International Treasury Fund and the iShares MSCI-EMU index, EZU.  However, IGOV contains only moderate exposure to PIIGS (23% of PIIGS Sovereign Debt).  However, this fund is invested in about 25% of Japanese Gov. bonds as well as over 15% in France and Germany.  If you are a worried about Sovereign Debt risk, in general, this might be a good short vehicle if you can borrow the shares.  EZU might be another broad-based PIIGS proxy, but companies based in France, Germany, and the Netherlands make up ~60% of the fund, with only about 25% in Spain and Italy and fractional amounts in Greece, Portugal and Ireland.  While Europe, in general, looks to be in trouble,  recovery in the Eurozone seems to exibiting two tracks.  As France and Germany, in particular, seem to be staging a moderate recovery, this may not be the best vehicle. 

There are country specific PIIGS ETFs, but shorting maybe prive difficult as shares are difficult to borrow. If you can find the shares these might be good opportunites to hedge or speculate on PIIGS risk:

Italy:

EWI  iShares MSCI-Italy

Ireland:

IRL  The New Ireland Fund

Greece:

There is currently no US ETF for Greece, however, there is an MSCI Greece index ETF: LYX0BF that trades on the Xetra exchange that many with online brokers can access. Keep in mind this fund trades in Euros. 

Spain:

SNF  Spain Fund

EWP  iShares MSCI-Spain

At ETFDESK, we endeavor to create an open forum for ETF investing, so other ideas are certainly welcomed.