Tag Archives: eurozone

The Greek Share Market: Poised For Significant Gains, After The Situation Calms Down

Summary The Global X FTSE Greece 20 ETF has declined by more than 50% since the beginning of 2014. The Greek government seems to understand the negative impacts of the potential grexit and they will have to fulfill the conditions of their Eurozone partners in the end. The Greek share market will grow significantly after the current problems are resolved. The growth will be strengthened by the European QE. The Greek share market represented by the Global X FTSE Greece 20 ETF (NYSEARCA: GREK ) has declined by more than 50% since the beginning of 2014. A major part of the decline happened in the second half of 2014 and in 2015 and it was caused by the renewed concerns about the potential grexit. The GREK share price behaved in line with the major markets (chart below) from the beginning. The problems started during the summer months and culminated in December and January when a political crisis led to early elections. The elections were won by Syriza, a party with a strong and loud anti-austerity rhetoric. Their way to power was paved by refusing the austerity measures and by a lot of unrealistic promises to the electorate. The new Greek government, led by prime minister Alexis Tsipras, initially demanded another debt writedown as well as a renegotiation of terms of the bailout program. After four weeks full of furious negotiations and a free fall of the Greek financial markets, the Greek government promised reforms, promised that it will not introduce any unilateral measures that would negatively impact the fiscal targets set by the “troika” and it declared its intention to fulfill its financial obligations. As a result, the bailout program should be extended by another four months. But a new list of reforms must be accepted by the Eurozone finance ministers before another financial aid disbursement. The proposed reforms were rejected by the Eurozone partners on March 9 and there is a threat of a Greek default as soon as this month. Although the initial reaction of the Greek representatives was highly negative, ranging from demands for German war reparations to threats of flooding Europe with immigrants. But on Friday, Tsipras reassured that Greece will hold its word given in February. It is more evidence that the Greek government realizes the painful consequences of the potential grexit. All the screaming and kicking around is just theatre for the Greek electorate. The grexit and the Greek default would lead to an immediate decline of the purchasing power of Greek citizens. The unemployment rate would grow above the current 25% level and the bank sector would be on the brink of a total collapse. Any chances of the current Greek government for a future re-election would drop to values close to zero. Yes, the grexit could be positive for Greece from a long term point of view. But the long term positives are not a sure thing. The only sure thing is huge pain in the short term. The most probable scenario is that the Greek government will keep on screaming and kicking, so that it can show their voters that they want to keep their promises and they fight for Greece, but they will surrender in the end in order to avoid the grexit and the responsibility for it. The Eurozone partners may make some minor compromises in order to give Syriza an opportunity to show their voters some “success”. But any major reliefs are highly improbable. The economy of the Eurozone is stronger than in 2012 and what is more important, the European financial sector is much better prepared for a potential grexit. The grexit is a much bigger threat for Greece than for the Eurozone today. As I wrote above, I expect that the situation will calm down and Greece will stay in the Eurozone. This is why I see a huge investment opportunity in Greek shares. As the chart below shows, GREK increased rapidly after its bottom in May 2012. It grew from $8.85 on June 1, 2012, to $18.80 on October 22, 2012. That’s more than 100% in less than five months. Yes, the historical results are no guarantee of future results, but history tends to repeat itself. Moreover, there is another powerful card in play this time. The European QE. The QEs led to inflation of a share market bubble in the USA. The same process has started in Europe now. And a lot of investors will direct their money into cheap Greek shares, after the situation around Greece calms down a little. I admit, I have no idea where the bottom will be and when it will come. It is possible that GREK will retest the 2012 lows in the coming weeks and it is possible that the bottom is somewhere near the current price level. Everything will depend on the progress of the Eurozone – Greece negotiations. The longer the negotiations last, the more the market’s nervousness will grow and the lower GREK will fall. The best solution is to wait until any kind of solution is reached and initiate a position in GREK. It may mean buying shares 10% or 20% above the bottom, but there will likely still be a huge upside remaining. Conclusion Although the Greek government is very loud and very aggressive, Tsipras seems to realize the negative impacts of the grexit on Greece and the future political careers of him and his party. I believe that Greece will surrender and fulfill the demands of its partners. In this case we can expect a huge increase of the GREK share price. It increased by more than 100% in less than five months, back in 2012. Similar gains are possible this time, given the supporting effects of the European QE. The best way to play this situation is to wait until the current complications between Greece and its Eurozone partners are resolved and initiate a long position. It may mean losing some initial gains of the bull run, but there should be still more than enough profits left. 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.

Sell SPY – Market Trouble Ahead On This Fed Path

Market relief following the resolution of the eurozone issue last month will be short-lived. Investors are now fully focused on the likelihood that the Fed will remove the “patient” language from its monetary policy statement next week that will allow for rate hikes thereafter. Over the next 6 months, as investors adjust their perspective to incorporate a rising cost of capital for American corporations, volatility should increase and a market correction is possible. A stock-pickers’ market should result, where favorable ideas can be bought cheaper, but the broader market security, the SPDR S&P 500 (SPY), should present more risk than reward. That market rally I was enthused about last month was short-lived. I would take long bets off the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) now, as volatility is back and a market correction is possible. Investors are now troubled about a rougher road ahead being laid by the Fed’s steps toward a tighter monetary policy. The adjusting market perspective is due to the shocking monthly jobs report just released last Friday. It surprised economists with frosty memories of winters past and expectations for slower economic activity. The all-too-good news has investors today focused on a perceived higher likelihood of Fed rate hikes sooner rather than later. This is a concern that makes for a rocky road ahead. Stocks should be volatile through the rest of the year, and should experience a correction or two. The likelihood of a clear trend-line higher this year is limited by the Fed’s plans. Last month, I correctly saw investor tensions built around fears of a Greece exit from the eurozone as overdone. I anticipated that the resolution I foresaw in Europe would allow pent-up capital that was clearly hidden away in U.S. treasuries, evidenced by historically low interest rates, to run back into stocks. It did, but not for long. You can see a clear move higher starting from February, before we hit a new wall of worry just recently. (3-Month Chart of SPY at Seeking Alpha) Today’s concerns are as important as the eurozone’s potential unraveling was. Today’s issues are more troubling though because Fed monetary tightening is on tap, and will drag on stocks for more than a moment. It cannot be resolved overnight like the Greece issue, despite the latest sensationalism and fear about Greece. For this reason, with Fed rate hikes on tap, I anticipate the possibility of a clear uptrend line for the SPY as very low for the rest of this year. And I believe a market correction or two is highly possible. What changed the recently rosy perspective of investors was the super-strong monthly jobs report just released on Friday. It showed nonfarm payrolls significantly higher than economists expected, and reported the unemployment rate further improved. Economists were likely remembering last winter when they were setting their estimates for the labor market, because this winter has been quite frosty for the Northeast. Boston is still buried in snow. It’s important to remember that labor data lags, and that first-quarter GDP could still disappoint. That’s especially true given that Q4 growth was just revised lower. The Federal Open Market Committee (FOMC) meets a week from Tuesday and issues its latest monetary policy statement next Wednesday. In her testimony to Congress last month, Chairwoman Yellen indicated that the removal of certain limiting language would precede Fed interest rate action, but not necessarily immediately precede it. Still, investors are showing their expectation now that the FOMC will remove the word “patient” from its monetary policy statement, and in so doing, clear the path for rate hikes that could occur at any moment thereafter. It’s important to note that the Fed also speaks about international concerns as a reason for its patience; see the last monetary policy statement . It had been referring to worries that Greece could unravel the eurozone, but it also refers to the danger of a dollar so strong that it hampers American exports. Janet Yellen has indicated that this is an issue the Fed has its eye on. The dollar has been appreciating significantly over the past week, so there is some possibility that the Fed could hold off on the removal of the language. However, the market and I seem to agree the possibility of that is highly unlikely. I believe it’s in the Fed’s interest to remove the language sooner rather than later, to allow the marketplace to reevaluate the relative value of the dollar. Fed rate hikes are a reality investors are going to eventually have to digest. Also, recently some Fed members have expressed an interest to act sooner rather than later so as to enable it to better control the pace of rate hikes, which is in the market’s best interest. Many investors see a June Fed rate hike as possible, and the removal of “patient” language from the March release will stir fear in some. My expectation is that the Fed will first raise rates in September. Nevertheless, the market has not perfectly incorporated Fed rate hikes, and the reality of the situation will force that now. Rate hikes matter because they raise the cost of capital for American corporations. That, in turn, raises the threshold for economic value creation, which impacts market value creation. While rate hikes are not expected to follow a steep path, investors will consider that favorable prospect at some future date. They will also ignore, for now, the fact that the cost of capital will not be significantly increased overnight. This information means that stocks will trade choppy this year, but I would not expect a steady trend-line higher. There is also immediate risk of a market correction as the market adjusts to the changing environment. Investors who bought the SPY on my past recommendation should now sell it. A stock-pickers’ market is in store, so investors will have opportunity to buy favored ideas at better pricing, but the broader market should be avoided for the next 6 months. I cover the market regularly and the SPY ETF, so relative interests may find value in my column . Disclosure: The author is long SPY. (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. Additional disclosure: My SPY position is negligible, and I have an open sell order.