(By Daniel Sckolnik) "Be a terror to the butchers, that they may be fair in their weight; and keep hucksters and fraudulent dealers in awe, for the same reason."– Miguel de Cervantes
European politics are certain to dominate the conversation among investors this week and should, more than likely, continue to be the focus of attention for the remainder of the month, either directly or indirectly.
In spite of reasonably positive numbers to have emerged from the corporate sector during the course of the current earnings season, it is all but impossible for Wall Street to ignore the present state of its largest trading partner. With over 20% of U.S. exports heading across the Atlantic to Europe, and 14% earmarked directly for the Eurozone, it would be a serious case of ostrich-style denial if investors chose not to notice the unsettling activity in the region.
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All it takes is one dysfunctional partner to create a dysfunctional relationship. And with an angry electorate screaming for change, any kind of change, whether it originates from the far right or far left side of the political spectrum, the Eurozone is moving deeper and deeper into dysfunctional territory.
During the course of the past weekend, France's Sakorsky was unceremoniously given "le heave ho"; Greece's main parties suffered a serious level of parliamentary attrition; and Germany's Merkel watched her increasingly fragile coalition travel yet another step in the direction of disassembly.
All of the above actions combine to indicate a strong, if not unexpected, shift in the political fortunes of both peripheral and core Eurozone members. What this means for the market is that the austerity-centered promises of the previous regimes of France and Greece have a high risk of being broken. And, if indeed they are broken, then the viability of the EU comes into question, and the immediate impact upon the economies on both sides of the Atlantic must be considered.
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As in any dysfunctional relationship, counseling may be sought, but it is the implementation of the advice that is the only real benchmark of change. In the case of the Eurozone, the primary advice has been to slash budgets and services in the name of achieving the levels of debt-to-GDP ratios that were original conditions of joining the EU club.
Now, however, with Eurozone unemployment hitting double-digit levels of nearly 11%, it seems that the populace of the region is insisting on relief, not austerity.
The bold but short-term relief that the European Central Bank provided to the region's banks via the recent implementation of LTROs apparently has not directly impacted the citizens of Greece or Spain. So while the problem of banking liquidity may have been addressed by the move, the problems of unemployment and recession have not.
An angry population has apparently decided that it wants to change the direction of the boat. Now it is a question of time as to just what direction the boat shall sail, or even whether it will make it to shore intact.
What the Periscope Sees
Last year, back in June, we were asked by Investor's Business Daily to recommend a few potential ETF trades. Our answer was to cast a wary eye in the direction of the Eurozone, and to consider shorting the sovereign debt situation via a pair of euro-centric funds. These included VGK (Vanguard European ETF), which tracks the MSCI Europe Index and is made up of the common stocks from 16 European countries, and FXE (Rydex Currency Shares Euro Currency Trust), which measures the relative value of the U.S. dollar against the euro.
Since then, a short on VGK would have yielded 17%, while a short on FXE would have resulted in a 10% gain.
With the current situation in the Eurozone amping up in terms of flux, both of these ETFs still present good shorting opportunities to consider.
Full disclosure: The author does not personally hold any of the ETFs mentioned in this week's "What the Periscope Sees."
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