European Concerns Return As Equity ETFs Fall

Chart courtesy of MarketWatch.com]

Although today wasn’t a big mover or shaker, the S&P 500 fell 0.57%. However, some European indices such as the DAX and FTSE gained over 1%. Meanwhile, the Euro barely budged against the dollar, remaining at $1.31/Euro.

The 10-year Treasury took another dip today, falling to a yield of 1.93%. Investors just don’t seem to have much consistency in their risk outlook given jumps and drops in the Treasury rate.

The primary focus right now is whether a suitable deal can be hashed out between the Greek government and its bondholders. Not only must they see on the same wavelength, but other Eurozone leaders as well as the ECB and the IMF are having their say. Trying to determine an appropriate haircut as well as a coupon rate for new bonds that is agreeable with all parties involved is going to be a big mess.

Following a similar path as Greece, Portugal is descending into financial ruin. Its 10-year bonds reached a record yield of 15.13%. With astronomical borrowing costs that would make debt repayment nearly impossible, Portugal will need some serious outside intervention quickly.

On top of the fact that its economy is supposed to have negative GDP growth this year, Portugal may require a nearly $40 billion bailout just to stay afloat. While Portugal is small enough to warrant a bailout, a similar event in Italy or Spain could be catastrophic given the magnitude of their respective debt loads.

According to the Department of Commerce, sales of new homes fell 2.2% in December while November figures were revised downward. Bottom line – the housing sector has a long road to recovery as alluded to by Bernanke and company, deciding to extend borderline zero interest rates until 2014.

If there’s any positive from the Fed’s zero interest rate policy, it helps out the bond ETF portion of our portfolio in terms of keeping prices high, although it might be difficult to add value for bond ETF newcomers.

While I can’t necessarily say that bond returns will knock it out of the park, although the TIPS did it last year, some steadiness is surely a plus if equity ETFs tank again, thereby triggering more flight to safety that will push up bond prices.

Ultimately, I still retain a very bearish view on Europe, which I believe will rear its ugly head soon as the PIIGS continue to unravel. Times like these make trailing stop losses ever more important for your portfolio.

Disclosure: Holdings in TIP