European Banking Crisis – ECB Action Is Not Enough

Ulli Market Commentary Contact

The ECB has taken drastic measures to ensure the liquidity, and probably more realistically, the solvency of the European banking system. Through long-term refinancing options, which are essentially near costless loans, the ECB has tried to kick start banks into lending mode.

However, as apparent in this Financial Times analysis video, these actions have failed to inspire confidence in the banking system. Despite obtaining over $600 billion from ECB loans, banks would rather build up cash reserves and park it at the ECB for chump change than lend it out and face the risk of no repayment. In turn, businesses can’t receive the necessary capital to engage in investment or properly carry on operations, thus negatively impacting the real economy.

Outside of the Eurozone’s poor public finances, Europe’s banks are the engine that will determine whether Europe’s financial system will run effectively. Insolvency is such a significant fear that banks are pursuing an ultra low risk strategy where they don’t even want to purchase government debt.

This leaves the ECB to foot the bill and take on dangerous exposure to countries with high borrowing costs such as Italy and Spain. In essence, the risk simply gets shoved to the ECB, putting Europe in greater danger if the ECB’s balance sheet starts becoming toxic, which would then trickle down to Europe’s biggest banks.

Although markets may not be hurting badly right now, a deepening of Europe’s banking crisis can rapidly change that.

Are Country ETFs Worth the Investment?

Ulli ETF News Contact

As the whole world seems to have turned upside down in a financial sense, it nevertheless beckons the question of whether opportunities still exist in some parts of the globe.

Although the U.S., Europe, and parts of Asia are going through difficult times to say the least, there are other regions which have appeared to do well on a short-term basis such as Latin America.

However, that’s not to say that effects of the European contagion can suddenly infect emerging markets partially dependent on European financing. We only have to look to U.S. Treasuries to see that investors worldwide are flocking to them during periods of great uncertainty.

We currently have country ETFs listed as a selective buy, but there are still inherent risks. Achieving diversification is difficult without purchasing a number of country ETFs from various regions. Meanwhile, Country ETFs are sensitive to political risk, especially as we saw last year in the Middle East with the Arab Spring, which led to significant volatility in Middle Eastern markets.

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01-06-2012

Ulli Newsletter Archives Contact

ETF/No Load Fund Tracker Newsletter For Friday, January 6, 2012

ETF/No Load Fund Tracker StatSheet

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THE LINK TO OUR CURRENT ETF/MUTUAL FUND STATSHEET IS:

https://theetfbully.com/2012/01/weekly-statsheet-for-the-etfno-load-fund-tracker-newsletter-updated-through-01052012/

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Market Commentary

Friday, January 6, 2012

POSITIVE JOBS NUMBERS ARE NOT ENOUGH TO PUSH UP MAJOR MARKET ETFS

Although unemployment fell to a 3-year low today, it didn’t do much to catapult markets as the S&P 500 fell 0.25%. However, the NASDAQ had its best week in 6 weeks.

Not only did tech stocks have a great week, but so did financials, which took a drubbing in 2011. For instance, Financial Select Sector SPDR (XLF) gained 3.2%.

As seen with the Euro dropping to $1.27/Euro, European discord still reigns supreme as the driving factor on investors’ minds and as indicated by PIMCO’s Mohamed El-Erian, who believes Europe is at a turning point to try and save itself. Furthermore, the 10-year Treasury dropped to a yield of 1.96%, illustrating the fear of European contagion spreading.

The major news of the day was the decrease in the unemployment rate to 8.5%. According to the U.S. Department of Labor, 200,000 jobs were added, surpassing expectations.

This is surely a positive trend, but there are still a significant number of part-time workers and marginally attached workers. Also, the labor force participation rate remains low at 64.0%. See the Bureau of Labor Statistics report for more specific info.

With housing a major concern as well, the Fed has suggested exploring alternative measures to improve the housing market. Seeing as zero-interest rates still have failed to boost the economy, Bernanke is coming to grips with the need for other solutions.

High borrowing costs in Italy are now raising questions about whether Italy can stay afloat financially. With its 10-year now at 7.09% and over $2 trillion in debt, I’m afraid that a bailout on top of austerity measures will not be sufficient. Italy may arguably be too big to fail but it may also be too big to bail at the detriment of other Eurozone members.

Looking at Europe as a whole, the 4th quarter will probably be another disappointment. Despite the holiday season, retail sales and consumer confidence fell. Whether the recent ECB measures to boost bank lending can help spur the economy is the big unknown.

Today’s unemployment figures are a glimmer of hope, but Europe is without a doubt the most pressing concern on our minds. Increasing equity ETF exposure still doesn’t make sense for the most part with the exception of a few sector ETFs. As the first week of 2012 has come to an inconclusive close, perhaps next week will be more revealing of how markets will trend.

Have a great week.

Ulli…

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READER Q & A FOR THE WEEK

All Reader Q & A’s are listed at our web site!
Check it out at:

http://www.successful-investment.com/q&a.php

A note from reader Kent:

Q: Ulli: In taking positions in bond funds/ETFs, if bonds are in an uptrend, do you tend to enter bonds, pretty much at any point, and use the 5% stop rule to keep you out of trouble?

It appears that waiting for pullbacks might prove to be harder with bonds, at least in recent history, when they’ve been so strong.  I’d be interested in your thoughts on this, when you get a minute, as my experience with bonds and bond funds is more limited.

Thanks!

A: Kent: Yes, you are correct. If you plan on buying a bond ETF, simply purchase it on a day when it’s down. That’s how I do it as I have not found a good way to buy on pullbacks.

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WOULD YOU LIKE TO HAVE YOUR INVESTMENTS PROFESSIONALLY MANAGED?

Do you have the time to follow our investment plans yourself? If you are a busy professional who would like to have his portfolio managed using our methodology, please contact me directly or get more details at:

https://theetfbully.com/personal-investment-management/

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Back issues of the ETF/No Load Fund Tracker are available on the web at:

https://theetfbully.com/newsletter-archives/

ETF/No Load Fund Tracker Newsletter For Friday, January 6, 2012

Ulli ETF Tracker Contact

ETF/No Load Fund Tracker StatSheet

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THE LINK TO OUR CURRENT ETF/MUTUAL FUND STATSHEET IS:

https://theetfbully.com/2012/01/weekly-statsheet-for-the-etfno-load-fund-tracker-newsletter-updated-through-01052012/

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Market Commentary

Friday, January 6, 2012

POSITIVE JOBS NUMBERS ARE NOT ENOUGH TO PUSH UP MAJOR MARKET ETFS

Although unemployment fell to a 3-year low today, it didn’t do much to catapult markets as the S&P 500 fell 0.25%. However, the NASDAQ had its best week in 6 weeks.

Not only did tech stocks have a great week, but so did financials, which took a drubbing in 2011. For instance, Financial Select Sector SPDR (XLF) gained 3.2%.

As seen with the Euro dropping to $1.27/Euro, European discord still reigns supreme as the driving factor on investors’ minds and as indicated by PIMCO’s Mohamed El-Erian, who believes Europe is at a turning point to try and save itself. Furthermore, the 10-year Treasury dropped to a yield of 1.96%, illustrating the fear of European contagion spreading.

Read More

Weekly StatSheet For The ETF/No Load Fund Tracker Newsletter – Updated Through 01/05/2012

Ulli ETF StatSheet Contact

ETF/Mutual Fund Data updated through Thursday, January 5, 2012

If you are not familiar with some of the terminology used, please see the Glossary of Terms.

 

1. DOMESTIC EQUITY MUTUAL FUNDS/ETFs: BUY — since 10/25/2011

The domestic TTI broke through its long-term trend line generating a Sell for this area effective 8/9/2011. Over the recent past, we’ve seen the TTI hovering slightly below and above this dividing line between bullish and bearish territory. The clear break to the upside occurred on 10/24/11 and, effective 10/25/11, a new Buy signal for domestic equities is in effect.

As of today, our Trend Tracking Index (TTI—green line in above chart) has broken above its long term trend line (red) by +2.61%. Be sure to tune into my blog for the latest updates.

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Still No Clear Direction For ETFs

Ulli Market Review Contact

[Chart courtesy of MarketWatch.com]

Once again, major market ETFs didn’t move much as the S&P 500 gained 0.29%. But European indices fell once more while the Euro dropped to $1.28/Euro, its lowest level in 15 months.

While markets may not be fully incorporating European uncertainty at the moment, the weak Euro clearly indicates European concern among investors.

Although the VIX is relatively low just above 20, it’s no time to regain a risk appetite and move heavily into equity ETFs with the exception of a very select few. Volatility surely hasn’t faded away.

Widening European bond spreads also show continued financial strain in the region. Italy’s 10-year yield rose above the unsustainable 7% level to 7.07% while Spain’s 10-year yield went up to 5.59%. As borrowing costs remain high, confidence has greatly eroded. One thing’s for sure – I have little confidence that Europe can find a long-term solution without significant outside intervention.

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