Tag Archives: greece

Will Recent Strong Gains In The Greek ETF Last?

Although the Eurozone markets have perked up on the recent QE launch, Greece continues to trouble investors. The country is still deep in debt and its unemployment rate is a nagging concern. The malaise intensified in December 2014 when the Greek prime minister Antonis Samaras called snap elections in the wake of the political strife in Greece and lost it (read: Polls Indicate Syriza Win: More Pain for Greek ETF? ). Anti-austerity party Syriza came to power and kept on negotiating with the ECB to reach a debt-deal while reinforcing the cancellation of steep austerity measures. At the time of election, the leader of Syriza had vowed to cancel the austerities and quite expectedly, the intent to end austerities is flaring up a disagreement with the EU/IMF, lenders risking Greece’s stay in the Eurozone bloc. Last week, in an interview to Germany’s Stern magazine , Prime Minister Alexis Tsipras promised that Greece will be “a completely different country,” in the next six months. This positive vibe charged up the waning Greece ETF, at least for the time being, and pushed up Global X FTSE Greece 20 ETF (NYSEARCA: GREK ) by over 20% in the last five trading sessions (as of February 13, 2015), though the fund has added just 3% in the last one month. Shares of the country’s biggest bank National Bank of Greece S.A. (NYSE: NBG ) spiked on hopes that the country will retain its spot in the Euro bloc and get assistance from the ECB. The shares of NBG skyrocketed more than 45% in the last five trading sessions (as of February 13, 2015). Will the Uptrend Last? While the market was anticipating a positive outcome, the chances of a clean ending to this situation seem less likely. On February 16, dialogues between the foreign creditors and Athens failed as the latter proposed a six-month extension request of its international bailout package. If the parties fail to reach a unanimous decision by February 28, the date which connotes the expiry of the four-year bailout program offered to Greece, the country and its banks would crash into a cash crunch. The European Central Bank will decide on February 18 whether an emergency lending to the Greek banks, which definitely carry high interest rates, should be continued or not. Notably, the country is due for a hefty loan repayment in March, per Reuters. The Greece banks are already seeing signs of a capital flight at an expected rate of 2 billion euros ($2.27 billion) a week. Overall, Greece is in for trouble yet again and investors have nibbling doubts on this risky market. The Athens Stock Exchange General Index slipped more than 3.8% at the close on February 16 as drumbeats of losses were heard after the country failed to strike a debt deal (read: Greek ETF Faces Volatility on ECB Move ). Financials make up about 30% of GREK and is an important driver to the returns of the fund and the country’s current economic issues. The fund currently has a Zacks ETF Rank #3 (Hold). Bottom Line Investors should remember that despite the recent takeoff, GREK has been on a sale with a P/E (ttm) of 11 times versus the biggest European ETF Vanguard FTSE Europe ETF’s (NYSEARCA: VGK ) P/E of 15 times and the Euro zone powerhouse Germany’s iShares MSCI Germany’s (NYSEARCA: EWG ) 14 times of P/E (ttm) figure. So, a bit of a way up was probably long in arrears for GREK. This is more so given Greece’s Q3 2014 growth rate (0.7%) outstripped all other Eurozone countries (read: What is Behind the Greek ETF Surge? ). However, if the country fails to negotiate with its Eurozone associates, the rosy economy which Greece has just started to enjoy might wither away before being in full bloom. Moreover, a discord will find other Eurozone countries from Malta to Greece’s biggest creditor – Germany – in dire straits. So, all eyes should be now on the progression of the debt deal before one can surely predict the fate of the euro, Greece and the broader European market.

Get Him To The GREK

The Global X FTSE Greece 20 ETF is a great way to leverage a favorable resolution between Greece and the euro-zone. The GREK is far off its 52-week high of $25.76, largely due to the political developments that have led investors to speculate about Greece leaving the euro-zone. The security is up from its low of $10.44 recently because of an increasing understanding that a favorable resolution is likely. Opportunity exists for near-immediate appreciation on the announcement of a favorable resolution as early as next week. Over the course of this year, the GREK ETF should gain further as it reflects the benefits of ECB actions like Greece’s peer markets have. Investors interested in leveraging the prospect of a favorable Greece resolution, but hoping to limit risk to any one individual Greek security, can look to the Global X FTSE Greece 20 ETF (NYSEARCA: GREK ). The security has come off its highs on fear that Greece could leave the euro-zone. Though it has also come off its lows on the prospect of a favorable resolution, it still has a way to go higher because of the ongoing absence of that event. I think investors can buy it here for immediate upside to $15 on a quick fix and longer-term gain to $17 to $20 this year. 5-Year Chart of GREK at Seeking Alpha As you can see here in the long-term chart of the Global X FTSE Greece 20 ETF, it has recently fallen precipitously. The reason for the decline should be obvious to anyone who has not been on a deserted island for the last couple months, save for a Greek island. When the popular Syriza party was elected into power in Greece, and before that when the polls showed it could be, Greek securities started to sell off. That was because of the tough talk against austerity that emanated from the party and its leaders. Fear rose that Greece could leave the euro-zone or be ejected from it due to the change in political power. But as time has passed, investors have become aware of what I already knew. Tough-talking Greek leaders do not have the backing of the Greek people to leave the euro-zone, as polls show a great majority of Greeks would vote against it in a referendum. That was known even before the elections, and Syriza indicated it was not interested in leaving the euro-zone, ensuring its election. However, Syriza still wanted an alteration to the bailout deals Greece had previously agreed to, due to the great damage austerity has done to many Greeks. The medicine while beneficial for the long-term economy was administered too much too soon and it made a good deal of Greeks sick, if not, unemployed. Over recent weeks, the emergence of a somewhat free-speaking Finance Minister, and Greek Defense Minister’s demands for Nazi war reparations have only stirred up more concern among the global investment community. Greek demands were met with tough talk from the Germans and other EU partners, so it got scary for some investors, who then bid the GREK security down to $10 and change. When the fear was palpable, I went long National Bank of Greece (NYSE: NBG ) at approximately $1 using long-term call options. Thanks for telling us now Greek , is what you are saying, but for your information, I just went long GREK Friday and it’s not too late still. I never had concern about the future of Greece, and was long GREK a few months ago at around $17. If Greece agrees to continued currency relations with its euro-zone partners, however altered the structure of the deal could be, much fear currently priced into the security must go away. Greece said today it will do whatever it can to reach a deal to keep it in the euro-zone; it has until February 28, but there is talk that a deal could be consummated as early as Monday. And it is in Germany’s interest to keep Greece in the euro-zone, because the presence of weak partners limits the upside of the euro, which serves Germany’s exports. 1-Month Chart of GREK GREK currently trades at approximately $13.63, after rising about 5% Friday. It was up Thursday too, and as you can see here, it has come off its low of $10.44. But GREK has upside from here, because before Syriza was elected, the security traded upward of $15, and before it was a concern altogether, it traded even higher with a 52-week high of $25.76. Now some of the security’s decline has been due to the general weakness of the European economy and that of Greece over the last 12 months, but Greek stocks should be benefiting year to date from the actions of the ECB, like its peers are. The iShares Europe ETF (NYSEARCA: IEV ) is up 4.8% year to date while GREK is down 5.5%. The Global X FTSE Portugal 20 ETF (NYSEARCA: PGAL ) is up 2.2%; the iShares MSCI Spain Capped ETF (NYSEARCA: EWP ) is only down 2.8% year to date because of Greece and Spain’s own similar political issues. Thus, given European shares seem to be finding bids here, there appears to be room to grow for GREK beyond just the immediate gain that should occur once it is clear Greece will remain in the euro-zone. I’m not anticipating a quick recovery to the 52-week high, but an immediate move to above $15 on a positive resolution seems likely to me. From there, I see no reason why the security that marks the Greek market cannot approach $16 in short time and $17 to $20 before year-end. So I say, get him to the GREK. I have been following these Greek developments, so interested parties may find value in following my column . Disclosure: The author is long GREK, NBG. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

GLD Drops 1.78% After FOMC Lockhart’s Confident Florida Speech

There are 2 main forces affecting gold price, Europe and FOMC. The drama in Europe has deflected the media attention which the FOMC deserves. Atlantic Fed President and FOMC Voter Lockhart deflected weak inflation arguments against liftoff in mid-2015. Lockhart argued that confidence in the progress towards maximum employment and stable prices is sufficient for policy tightening given the lag in monetary policy. Lockhart’s compelling argument forced GLD to drop 1.78% and reinforced the bearish trend on GLD. FOMC Neglected Amid Excessive European Drama Coverage In today’s context, there are 2 primary forces that are actively influencing the price of gold which we should always keep in mind when we evaluate our gold investment. On one hand, we have the headlines news about Europe and Greece on CNBC, CNN and all the major news outlet. These news station give us an overexposure to the latest flip-flops in the sovereign debt negotiations simply because it is good non-fiction drama that will keep their viewership high. In what comes as news, we have Greece taking on a seemingly compromising stance to offer a ‘menu of debt swap’. Germany rejected it and asked the Greek government to forgo its campaign promise of ending its austerity measures by repudiating its official debt and increase social spending. Greece then refuted that and take a hard stance in its debt negotiations which eventually lead the European Central Bank to cut off Greece of its cheapest debt financing using its sovereign bond as collateral. The Greek response was to demand for $11 billion euros of repatriation for World War II which Germany swiftly rejected. Greece responded with its latest initiative by involving OECD to provide credible 3rd party alternative to its reform imperative over that proposed by its official creditors, collectively known as Troika. In the background during this period of rapid change is the uncertainty of Greece membership within the European Union and the spillover effects in terms of geopolitical security such as the possibility of Greece leaving NATO to back Russia in the Ukraine conflict. Given the extensive media coverage on Europe, it is easy to forget the other side of the picture. In my earlier article, Hold GLD In The Tug Of War Over Financial Stability In 2015 , I have argued that it is the primary issue of financial stability that is driving the price of gold for now. As much as we care about the European drama, we have to keep in mind the powerful Federal Open Market Committee (FOMC) which is not receiving its fair share of attention from market participants due to inadequate media coverage. The FOMC is a dominant force of financial stability with its clear intention of policy normalization which will provide meaningful risk-free interest rates for conservative investors such as insurance companies and pension funds. These conservative investors hold significant amount of retirement funds which may not be willing to chase the riskier equity market and should not be there in the first place. Their absence will provide the forming of financial bubbles. Lockhart Neutralized Weak Inflation and Wage Growth Constraint Let us pay some due attention the Atlanta Fed President Dennis Lockhart who is a voting member of the FOMC this year. Lockhart gave his speech titled, Considerations on the Path to Policy Normalization at the Southwest Florida Business Leaders Luncheon on 06 February 2015. In my opinion, his speech is very supportive of the mid 2015 liftoff in the Federal Funds rates and this is putting pressure of gold as much as it is supportive of the strength of the USD. Lockhart gave a balanced assessment of the economy and discussed the possible constraint on the liftoff alongside with the factors supporting it. He came to the conclusion that based on current data, he is confident that the economy would have recovered to the point where it is conducive for a liftoff in mid 2015. I think the economic recovery of the United States is well established in the market right now and so before we go into the reasons supporting the liftoff, we shall look at how Lockhart address the issue of inflation. The obvious problem with inflation is that it is below 1% and far from the 2% inflation target no matter which measure of inflation you look at. For example, if you were to look at the latest Consumer Price Index (CPI) shows that prices increased by 0.8% in December 2014 when compared to December 2013. Annual core CPI might look better at 1.6% in December 2014 but it is part of a falling trend of 1.8% and 1.7% in October and November 2014 respectively. If we were to refer to the core Personal Consumption Expenditure (PCE) on a monthly basis, we will observe 2 conservative months of 0% growth for November and December 2014. (click to enlarge) Source: Tradingeconomics The chart above which compares U.S.inflation and core inflation rate according to CPI and this should anchor the point that inflation is still a distance from the 2% inflation target in the U.S. The other potential deterrent for a mid year liftoff is the low wage recovery. Given the tight labor market and the pace of jobs recovery, wages should be raising at 2%-4% based on the experience of previous recovery instead of the 0.5% increase as reported by the Department of Labor recently for January 2015. We have to keep in mind that the strong economy added 257,000 jobs in January 2015 after 329,000 jobs were added in December 2014. This has encouraged 155,000 discouraged workers to apply for jobs and re-enter to labor market. The expanded labor pool increased the unemployment rate from 5.6% to 5.7% resulting in a 0.2% increase in labor force participation of 62.9%. This quote from Lockhart sums up the challenges of weak inflation and wages increment that is facing the United States today. Just as current readings of inflation give some pause, broad wage trends seem to suggest we are not yet on the cusp of full employment. The quite modest growth of wages across the economy does not seem normal given the solid growth numbers we’ve seen in recent quarters. The Lockhart Defense Given all these headwinds against mid year liftoff, we shall look at how Lockhart defends his support for it in the next section of this article. Lockhart has 3 main points to decide his support which is scattered throughout his speech for the sake of a logical flow of ideas. I shall summarize it here as confidence in the projected economic recovery, improving market inflation compensation data and finally the requirement to ignore transient low energy prices given the lag in monetary policy. These 3 main points are actually linked towards the final destination of a mid 2015 rate hike. Lockhart expressed confidence in the sustained recovery of the economy. He foresaw growth of 3% for 2015 and 2016. This is supported by the strong economic data published recently. In addition, he has confidence that the dual mandate of maximum employment and stable prices would be achieved within 1-2 years. Lockhart shares the same view as the FOMC majority that inflation is transitory and would pass. The previous FOMC has mentioned before that market based inflation compensation remains weak while survey based inflation expectations remains well anchored. In his speech, Lockhart mentioned that market based inflation compensation has recovered and this gives him renewed confidence that inflation will catch up. This is Lockhart in his own words: Since mid-January, some inflation-compensation measures have shown signs of reversing. A firming in the inflation compensation data from their year-end lows is an example of the kind of encouraging development that will bolster my confidence in the medium-term outlook. If we look at the inflation data above, it started to show signs of weakening with July 2014 reading of 2.0% down from 2.1% in May and June. This coincides with the decline in oil prices which the FOMC attribute to the disinflation influence. Lockhart is a more dovish as he focus on the weak inflation numbers instead of the strong employment numbers indicating less capacity slack. Inflation is appropriately a focal point because its firming will reduce concerns that the economy is somehow stalling, that prophesies of long-term stagnation have any basis, and that chances of accomplishing the FOMC’s policy goals are receding. Lastly it is noteworthy that for this policy dove, there is no need for the 2% inflation target to materialize before he would move policy forward. Lockhart stressed in his speech that there is no such thing as 100% confidence and he would accept sufficient confidence. He would require the confidence that economy would move towards the Fed’s dual mandate would suffice due to the time lag between monetary policy implementation and the effects being seen on the economy. The distance between current conditions and our goals doesn’t have to be completely closed for the FOMC to start moving interest rates higher. Monetary policy is, of necessity, forward looking. If, as we look forward, it seems likely we will achieve our policy objectives, then we can consider beginning to adjust policy. Lockhart Impact on the SPDR Gold Trust ETF ( GLD) Lockhart has effectively swept away the reminding credible objection to the Fed’s interest rate hike in mid 2015. He devoted the bulk of his speech to that with a smaller part of his speech reinforcing the idea that the economy is on a strong growth trajectory to his audience. As his primary target audience are Florida businessmen, he made the point that the FOMC is expressing confidence in the economy when it raises rates and this will be self-reinforcing. From a Main Street perspective, the important point for business planning is that monetary policy is likely to shift sometime this year, and a higher interest-rate environment will ensue. The decision to begin normalization should be a signal that the FOMC is confident the economy is on track to achieve its objectives and that the economy should have sufficient strength and momentum to handle higher rates. The start of the process of normalization should itself instill confidence on Main Street. (click to enlarge) If we look at the chart daily above for GLD, we can see the extent of Lockhart’s influence on gold prices. It is noted that Lockhart speech came on the same day as the strong January 2015 labor data report so one might argue that it is the labor report which pushed down the price of gold. However we should remember that it is the FOMC members who interpret and give meaning to the labor numbers in the monetary policy decision making process. GLD opened at $119.15 on the day of his speech and closed at $117.07, marking a 1.78% decline over 4 trading days. This would be something that investors would have missed out on if they placed too much attention on Europe at the expense of the FOMC. It is clear that there is a shift in gravity from Europe back to the FOMC. The Greek drama is old news, expected and hence priced into the market. Unless there is a significant move such as a Grexit or large scale violence, further rhetoric from Europe no matter how much headlines they grab, will not move GLD up. This should be the case until the end of the month and I note that GLD is crossing in the $117 price neckline. Lockhart’s speech is persuasive and its makes a compelling case for a lift-off in mid 2015. Its serves to further reinforce the bearish sentiment in the gold market which would have otherwise rebounded on the $119 resistance level. Once again, Lockhart speech is a timely reminder of the market influence for the FOMC members. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.