Tag Archives: nysearcauup

Profiting From Greece And ECB Events

Summary Greek election result and what it means for investors. European Central Bank quantitative easing and what to expect from the Euro. Recommendations to profit from these moves. This is a very unusual article for me, as my regular readers will know, since I generally invest long term. I authored another similar article in March of 2012 about the Greek debt situation. This is a special situations and I believe that such opportunities should not be ignored. I also write a series about hedging and this particular situation falls neatly into that category. There are two issues coming out of Europe over the last week: the European Central Bank [ECB] quantitative easing [QE] program and the Greek election results this Sunday, January 25, 2015. The QE announcement was expected, but the size of the program was about twice what was being rumored and caught the markets by surprise. The Greek election turned out about the way early polls implied but still has the potential to create instability on the continent. The two events taken together sends a message that we should be cautious when investing in Europe. But, then again, there may also be some opportunity to profit. Greek Election With about 90 percent of the votes counted it is projected that the Syriza Party will win the election and come away with a total of 149 of the 300 seats in Parliament. That includes the 50 extra seats given to the winning party and leaves Syriza leader, Tsipras, two seats short of an outright majority. That means that Tsipras will need to entice one of the other smaller parties into forming a government. And that is likely to lead to compromise; on what, I do not know. But without having won outright control, Tsipras may not be able to move as far or as fast as his constituents are expecting. That may be good because it will give Tsipras an excuse and may give him more time to negotiate whatever the eventual agreement with the European Union [EU], ECB and the International Monetary Fund [EMF] from which past bailouts have come. The bottom line, in my humble opinion, is that this creates uncertainty in the EZ. Some expect Greek to exit the EU, others expect at least some Greek debt forgiveness, while others expect Greece leaders to cave into the demands of continued austerity. No one knows for sure what will happen. This uncertainty is likely to further undermine the already weakening Euro currency against other major currencies, especially the U.S. dollar. However, since the worst possible outcome of outright control by Syriza (worst case for the EZ) did not occur, the initial impact could be muted. ECB and QE Investors who own shares of companies that are either domiciled in the Euro Zone [EZ] or conduct significant business there, should consider taking steps to protect holdings from what I expect to be additional downside risk from currency translations. The ECB announced last week its intention to initiate a 1 trillion euro quantitative easing program in March 2015 expected to last through at least September of 2016. Now that the initial impact from the program announcement has taken its toll, we may see the Euro drift sideways unless my interpretation of the Greek election is off. Recall what happened to the Japanese Yen relative to the US dollar after the US ended its QE3 and the Japanese Central Bank announced shortly after that it would expand its QE program in late October of last year. There was an initial steep sell off over the first few days followed by a more gradual, but still significant, continued decline in the value of the Yen over the next four weeks. The Yen has continued to trade with a range since that time, but weekly moves are can still be volatile. See the chart of CurrencyShares Japanese Yen ETF (NYSEARCA: FXY ) below. FXY data by YCharts The Euro has been in a downtrend for the last six months (see chart of the CurrencyShares Euro ETF (NYSEARCA: FXE ) below), but the rate of decent increased about the middle of December when Draghi of the ECB indicated that QE in the EZ was coming soon. During this period it was widely accepted that the ECB would initiate a QE program in the range of 500 billion Euros. After the announcement of one trillion Euros hit on January 22, the Euro fell to an 11-year low near $1.1 / Euro. But the program has not even begun yet and will not get started until March! FXE data by YCharts A prolonged QE program aimed at weakening the Euro against the U.S. dollar and other major currencies will, in my opinion, be successful to the extent that the Euro will weaken further. Of course, the idea is that a weakening Euro will make EZ produced goods more competitive in the global marketplace; hence, increasing demand for EZ goods, creating jobs, increasing GDP and moving inflation up a notch or two. The problem is that other central banks are not likely to sit idly by and do nothing. As a matter of fact, both Canada and Denmark cut rates in the last week and Japan is determined to weaken the Yen further; others will likely follow. In other words, the ECB will probably be successful in weakening the Euro against the U.S. dollar and create inflation, but the other goals are less certain. The U.S. Federal Reserve Bank [FED] is unlikely to take further QE actions as such a move could be construed as a retaliatory move. That could move the world dangerously closer to an all-out currency war; something no one wants or needs. Thus, even with short-term U.S. interest rates pegged near zero, the U.S. dollar is more likely to continue to strengthen against other currencies, especially the Euro. Before I make my recommendations I must stress that using leveraged ETFs is always a very short-term strategy. Holding leveraged ETFs long-term, much more than a week, is generally a losing proposition. If you can’t monitor your positions at least once a day, please don’t consider this trading strategy. Unleveraged ETFs are less volatile and can be held longer. Recommendations PowerShares US Dollar Bullish ETF (NYSEARCA: UUP ) is an unleveraged US Dollar Index ETF that goes up when the US dollar rises relative to a basket of other major currencies, including the euro. Daily average volume is 1.7 million shares, a very important point because you don’t want to trade an ETF that is thinly traded and run the risk not being able to close out a position when you want. My theory is that the uncertainty created by the Greek elections combined with the ECB move with put downward pressure on the Euro over the next few weeks and potentially even longer. I own UUP now and may add to my position, primarily as a hedge against currency translation losses by companies that do extensive business in Europe. This position has done well and I expect the trend to continue (see UUP chart below). UUP data by YCharts ProShares Ultra Short Euro ETF (NYSEARCA: EUO ) is a double-leveraged inverse ETF on the euro that goes down twice the amount that the US dollar increases relative to the euro. EUO daily average volume is about 1.3 million shares, thus providing adequate liquidity also. The unleveraged short Euro ETFs did not have adequate trading volume to warrant a recommendation. I do not hold any EUO at this time but plan to take a short-term position within the next week. This is more of a momentum play and not my usual cup of tea, so my position will be very small and short-lived. The trend for EUO has been strong and I believe that there is still more to come, but for how long I do not know (see EUO chart below). EUO data by YCharts Again, this is meant as a means to protect at least some of what you have, not as a get-rich-quick scheme. Don’t plan to hold the position beyond the point when the prices begin to turn against you. It would be prudent to use trailing stops to protect your capital. A drop of more than five percent is significant, thus I would keep my trailing stops at five percent. The leveraged ETFs are very risky securities, and can lose you money if held long-term. It is the nature of how these securities are designed. They can be solid performers over relatively short periods only. Be careful out there! Additional disclosure: I intend to initiate a short-term position in EUO this week.

Best And Worst Performing Currency ETFs Of 2014

Currency markets had an eventful 2014 with the U.S. dollar touching multi-year highs against a basket of major currencies. Improving U.S. economic data, escalating geopolitical tensions, diverging central bank policies around the world and chances of a sooner-than-expected rate tightening cycle in the U.S. were some of the factors contributing to a stronger greenback. In fact, divergence in monetary policies across the globe was one of the primary factors for the strong advance in dollar this year against major currencies. While the Fed has wrapped up its QE program and is expected to start raising rates sometime this year, central banks of some of the major developed nations have stepped up their monetary stimulus programs to stimulate their struggling economies. Stronger U.S. recovery and speculations of a faster-than-expected rate hike are leading investors to pull out capital from emerging markets and pour it into U.S. stocks, causing the currencies of these nations to take a plunge. Given this, we have highlighted two of the best performing and worst performing currency ETFs of 2014 below. These were big movers in the currency market, and undoubtedly investors are expecting big things out of these currencies in 2015 as well: Best Currency ETFs of 2014 Market Vectors Indian Rupee/USD ETN (NYSEARCA: INR ) Indian equity markets have posted stellar performances this year driven by optimism over the new pro-reform, business-friendly government led by Prime Minister Narendra Modi. In fact, the Indian economy has been witnessing improving macroeconomic conditions led by better-than-expected corporate earnings, a falling inflation level and improving manufacturing and industrial production. Moreover, steps taken by the RBI governor have been successful in narrowing the current account deficit. These factors led the Indian rupee to be the best performing major currency worldwide against the dollar during 2014 and INR to be the best currency ETF this year. The fund tracks the performance of the S&P Indian Rupee Total Return Index, providing exposure to exchange rate movement of the U.S. Dollar against the Indian Rupee. The product is, however, quite unpopular and illiquid with an asset base of under $2 million and average trading volume of 27,000 shares a day. The fund charges 55 basis points as fees and has returned 14% this year. INR currently has a Zacks ETF Rank #3 or Hold rating. PowerShares DB USD Bull ETF (NYSEARCA: UUP ) Thanks to a stronger U.S. economic recovery led by higher-than-expected U.S. GDP growth numbers, renewed optimism in housing activity, continued job creation and rising consumer confidence combined with global factors, the U.S. dollar emerged as a strong currency this year. The fund tracks the performance of the Deutsche Bank Long US Dollar Index (USDX) Futures Index to provide exposure to the performance of U.S. Dollar against the following currencies: Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc. In terms of holdings, UUP allocates nearly 58% in Euro, while 25% collectively in Japanese Yen and British Pound. The fund has so far managed an asset base of $959.9 million and sees an average daily volume of 1.8 million shares. It charges 80 bps in total fees and expenses. The fund has added 11.3% in 2014 and has a Zacks ETF Rank of 2 or ‘Buy’ rating with Medium risk outlook. Worst Currency ETFs of 2014 CurrencyShares Swedish Krona Trust ETF (NYSEARCA: FXS ) The Swedish Krona has been among the worst performing currencies in 2014 against the greenback, with FXS plunging 18% this year. This is especially true as the currency is struggling badly in the wake of record low interest rates and deflationary pressures. The central bank’s unexpected move to slash interest rates to zero in October in order to fight deflation further aggravated the situation and led the currency to struggle badly against the U.S. Dollar. The fund tracks the price of the Swedish Krona relative to the U.S. Dollar managing an asset base of $25.3 million. The fund is quite illiquid with average daily volume of just 2,000 shares. The fund charges 40 basis points as fees and currently has a Zacks ETF Rank #3 or Hold rating. CurrencyShares Japanese Yen Trust ETF (NYSEARCA: FXY ) Though the Yen was performing well in the first part of the year due to its safe haven appeal in the wake of rising geopolitical tensions, it plummeted to a seven-year low in the second half due to an ultra loose monetary policy adopted by the Bank of Japan (BoJ). Weakening growth conditions and sliding consumer prices led the BoJ to expand its monetary policy in 2014 leading to a slumping Yen. FXY measures the relative values of two currencies, the Japanese Yen against the U.S. Dollar. The fund gains in value as the Yen appreciates relative to the Dollar. The fund manages an asset base of $105 million, charges 40 basis points as fees and trades with good volumes of 200,000 shares a day. FXY plunged roughly 13.7% for 2014, continuing its long term track record of weakness and pushing its two year loss to -27%.

What Do 2014 Winners Say About 2015?

Summary The yield curve flattened in 2014 as short-term rates increased and long-term rates declined. Utilities benefited from lower long-term rates and is set to finish the year as the best performing sector. The U.S. dollar rally in 2014 looks like the early stage of a much larger rally. One of the biggest trends in 2014, for both length of time and the size of the move, was the bull market in long-term government bonds. The 30-year U.S. Treasury bond will finish the year near its highest level in decades. The 10-year treasury yield of nearly 2.2 percent is off the lows set in 2012, but near the levels reached at the depth of the 2008 financial crisis. There may even be room to move lower because that yield looks plentiful next to German and Japanese 10-year government bonds, which yield a paltry 0.55 percent and 0.33 percent, respectively. Investors who purchased iShares Barclays 20+ Year Treasury (NYSEARCA: TLT ) at the start of the year would be sitting on gains of more than 26 percent as of December 29. That is competitive with the best performing S&P 500 sectors in 2014 and gives it a better than 10 percent lead on both the S&P 500 Index and the Nasdaq this year. As for those best performing sectors, utilities and healthcare are set to grab the top two spots. (click to enlarge) In the currency market, a bull rally in the U.S. dollar kicked off in mid-summer against the yen and euro, and this extended to emerging market currencies by the start of autumn. The U.S. dollar heads into 2015 in a widespread bull market against all major currencies, with even the Chinese yuan showing signs of weakness. A Look Back At Interest Rates In 2014 This year started with investors expecting a rise in interest rates after the Federal Reserve began tapering its asset purchases in December 2013. The Fed ended its third round of quantitative easing (QE3) in October, but history proved superior to expectations: each time the Federal Reserve has exited quantitative easing, interest rates moved lower, not higher, and this time was no different. Rates peaked at the start of the year and never looked back, beginning an almost uninterrupted slide that has yet to finish. (click to enlarge) Economic growth failed to spur general rate increases. GDP growth dipped in the first quarter, then picked up strongly in the subsequent quarters, eventually climbing to 5.0 percent annualized growth in the third quarter. Despite these robust growth numbers, long-term bonds will close out 2014 at or near their highs for the year. Interest rates didn’t fall across the board though. The 2-year treasury yield has been rising since the Federal Reserve announced the taper in May 2013. The 5-year treasury yield didn’t gain in 2014, but it didn’t fall either. (click to enlarge) (click to enlarge) Rising short-term rates and stable or falling long-term interest rates makes for a flatter yield curve. A flat yield curve usually occurs in the middle of an economic expansion, when the economy is firing on all cylinders. Sector Performance Utilities and healthcare are the best performing S&P 500 sectors by a wide margin in 2014. Utilities last delivered a sector topping performance in 2011, when long-term interest rates sank to their lowest point in decades and stocks generally struggled-the S&P 500 Index gained only 2.1 percent that year. Going back further, utilities topped the list of S&P 500 sectors in 2006 as well. Investors with good memories will remember many early recession calls at that time due to a flat yield curve. Healthcare and utilities get lumped in with consumer staples as “defensive” sectors, but the strength seen in these sectors doesn’t indicate a weak market ahead. Healthcare has benefited mightily from the performance of the non-defensive biotechnology sector. SPDR Biotechnology (NYSEARCA: XBI ) is up more than 44 percent this year, for example, well ahead of the healthcare sector. If investors were looking for defensive plays, the sector would be led by pharmaceuticals or healthcare providers rather than biotechnology. Utilities are generally a conservative choice for investors, but the utilities sector was in a downtrend from 2009 to 2014. Working in the sector’s favor is a strong economy and lack of exposure to foreign markets. (click to enlarge) Currency Markets The U.S. Dollar Index broke out to a multi-year high in 2014 and will finish the year near its highs. The greenback was aided by six factors. First, the Federal Reserve tightened monetary policy with its exit from QE. Second, the European Central Bank is moving towards loosening monetary policy with its own version quantitative easing. Third, the Bank of Japan did a surprise expansion of QE on Halloween. Fourth, the collapse in oil prices dragged emerging market currencies lower. Fifth, China’s rebalancing has weakened emerging markets by reducing commodities demand. Sixth, the U.S. economy is among the strongest of the developed economies. The chart below is a price ratio of PowerShares DB U.S. Dollar Index Bullish Fund (NYSEARCA: UUP ) versus SPDR S&P 500 (NYSEARCA: SPY ). It shows that since July, investors could have earned more by investing in the U.S. dollar (going short a basket of foreign currencies that make up the dollar index) than from stocks. This is surprising for a bullish phase of the market-since 2008, U.S. dollar rallies have typically come along with stock market corrections. (click to enlarge) There is a lot of positive sentiment around the U.S. dollar, but structurally the global economy is still short the U.S. dollar. Well into 2014, for instance, Chinese property developers were borrowing in U.S. dollars . An extended U.S. dollar rally could be the only fuel needed for an even bigger and longer U.S. dollar rally if borrowers in emerging markets are forced to hedge their dollar exposure or repay debt. Rising interest rates in the United States, a bias towards rate cuts in China, plus easy money in Europe and Japan, puts the greenback in a strong position in 2015. What It All Says for 2015 Although sector performance in 2014 flashes a caution light, the yield curve is flattening, not flat. The yield curve would need to flatten much more before it would signal a possible recession, but the Federal Reserve isn’t going to raise rates enough to flatten out the yield curve in 2015. The U.S. economy continues to expand and the political situation is favorable for stocks. The Republican Congress and President Obama are unlikely to agree on much, but they do agree on trade deals and possibly even some tax reform. If the U.S. dollar rally continues into 2015, the macro environment will bear a striking similarity to the late 1990s. A continued rise in short-term interest rates is coming, at least until the Federal Reserve signals otherwise. It remains to be seen how long-term interest rates behave, but they could remain low whether short-term rates rise or fall. Far lower interest rates in Europe and Japan, in addition to the rising U.S. dollar, could keep a lid on interest rates if foreigners move capital into the U.S. bond market. Weakness in high yield debt, the fallout from low oil prices, will also work in favor of government bonds. Among S&P 500 sectors, utilities are most affected by the 10-year interest rates. This chart shows the 10-year treasury bond yield versus the price ratio of SPDR S&P 500 and SPDR Utilities (NYSEARCA: XLU ). The falling black line indicates XLU beating SPY, which has occurred for most of 2014 as interest rates declined. Utilities are unlikely to lead again in 2015, but as long as the rate environment isn’t a drag on returns, the strong economy and relatively high yield of the sector could keep it among the better performing sectors next year. (click to enlarge) If both short-term and long-term interest rates increase, the sector that stands to benefit the most is financials. Any broad ETF such as iShares US Financials (NYSEARCA: IYF ) or SPDR Financials (NYSEARCA: XLF ) delivers good exposure. The strong dollar and strong economy work in its favor, and if the dollar rally is a major trend in 2015, financials will benefit as foreign capital flows into the U.S. through American financial institutions. Under performing sectors such as energy and materials could rebound in 2015 after a dismal 2014, but if the global economy doesn’t pick up, a rally could be short lived. A major issue that could affect healthcare stocks in 2015 is the Supreme Court ruling on Affordable Care Act subsidies. The law as written does not allow subsidies for states without exchanges and if the Supreme Court were to rule against them, the history of the Obama Administration’s handling of the law suggests a period of confusion will follow. A Republican Congress doesn’t make the administration’s job any easier – if a fix requires Congressional approval, they may not get it. Finally, an important test for the euro will come in January. The European Central Bank meets in January and Greece’s election is at the end of the month. Sentiment is negative right now because the market expects the ECB to implement some type of QE policy and Greece to elect an anti-austerity government. If one or both of those things don’t occur, the U.S. Dollar Index, which has nearly 58 percent of its basket in the euro, could run out of steam at least temporarily. Barring such an outcome, the strong U.S. dollar will continue to weigh on stocks denominated in foreign currency. A QE policy in Europe would likely boost equity markets though, so funds that hedge away currency exposure, such as WisdomTree Europe Hedged Equity (NYSEARCA: HEDJ ), will do better than their unhedged competition.