17
Jan
2012

ETF Periscope: Are Latest S&P Ratings On EU Baked In or About to Burn the Market?

Are Latest S&P Ratings On EU Baked In or About to Burn the Market?


Life is a series of natural and spontaneous changes. Don't resist them -- that only creates sorrow. Let reality be reality. Let things flow naturally forward in whatever way they like.” -- Lao Tzu

They’re back.

That same gang of market overlords who so badly botched the ratings of billions upon billions of dollars in sub-prime loans during the new millennium ’s first decade can be found once again front and center of a new action that could send the market into a serious tailspin.

Except this time, they might actually be getting it right.

In a report released after Friday’s market closing, and one that will be studied closely by analysts and investors, Standard & Poor’s continued to roil the European Union with its latest round of downgrades.

In spite of herculean efforts to defend its monetary and fiscal condition, France found itself on the receiving end of an S&P smack down. The triple-A credit rating that the French government brandished like a badge of honor was unceremoniously taken away, replaced with a slightly less shiny double-AA-plus, with the additional insult of a negative outlook added for affect.

During a press conference on Monday, France’s beleaguered President, Sarkozy, insisted the ratings agency’s action wouldn’t impact France’s economic policy or decisions.

Maybe, maybe not.

What it could do is affect the cost of borrowing for the euro-zone’s number two economy, and that’s something that would have a direct impact on France’s financial affairs.

Is the downgrade deserved? Arguably, yes, at least according to S&P. It seems that the ratings agency isn’t quite convinced that many of the downgraded countries, including France, have taken sufficient action to “address ongoing systemic stresses in the eurozone.”

In plain English, all the EU countries that were taken down a notch besides France, including Austria, Malta, Slovakia and Slovenia, as well as Spain, Italy, Portugal and Cyprus, which were taken down a pair of notches, aren’t really earning enough to pay off either their current or projected debts.

And, with the flawed “en vogue” opinion that fiscal austerity will somehow reverse this situation currently holding sway, it is unlikely that the euro-zone will avoid a recession, if not an outright disorderly dismantling.

So now Wall Street and the European bourses will figure out if these new ratings have been adequately “baked in” to the current price of the equity market or if a further price adjustment to the downside will be warranted.

Should investors decide that more heat needs to be added to the recipe, it will strongly influence the direction that the market will trend for the first half of 2012.

What the Periscope Sees

At the birth of the New Year, the Periscope took a peak out towards the investment horizon of 2012. Here’s a quick recap of the ETFs that were picked:

EUO (Proshares UltraShort Euro) serves as a good way to play Europe to the downside. EUO tracks the euro and corresponds to 2x

(-200%) the opposite of the daily performance of the U.S. dollar price of the euro. Year-to-date, it is up 5%.

FXI (iShares FTSE China 25 Index Fund) tracks the FTSE China 25 Index, and, initiated as a short play, offers an opportunity to bet that the China bubble may be due for a pop. YTD, down 5%.

GLD (SPDR Gold Trust), which tracks gold bullion, is the ETF of choice for many gold traders and investors, many who feel that gold has corrected adequately and has found a new base of support. YTD, up 5%.

AMJ (Alerian MLP Index ETN) tracks the Alerian MLP Index. MLPs (Master Limited Partnerships) were created as a tax incentive for energy investors during the Reagan years. Alerian remains a solid play on the MLP energy sector. YTD, down 0.1%.

This foursome, which serves as something of a “multiple-pairs trade,” remains as a reasonably good play for the moment, as it just may be able to handle whatever the market tosses its way.

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.

ETF Periscope
daniel / Tag: AMJ, ETF, EU, EUO, euro-zone, GLD, S&P, Standard & Poor’s FXI /