Posted on Monday, December 19th, 2011 | In Exchange Traded Funds
Chris Ciovacco: The concept of a “back-door bazooka” is based on a recent policy change made by the European Central Bank (ECB). Reuters summed up the pros and cons of the stealth bazooka concept this way:
Instead of unlimited bond buying, the ECB will offer banks this week an opportunity to borrow money for three years for the first time, extending the current one year maximum ceiling for refinancing. France hopes banks will use the money to buy euro zone bonds, and ease the upward pressure on yields, but Italy’s Unicredit bank said last week this “wouldn’t be logical” for banks under pressure to reduce risk and rebuild capital.
Given the record bearish stance relative to the euro and the strong correlation between the currency and stocks, the markets may rally in the short-term, with the back-door bazooka adding another reason to assist with the much anticipated Christmas rally. However, as described in the video below, it is unlikely the ECB’s three-year loans will calm the markets longer-term.
We all know debt levels around the globe are high, but when does the level of debt become unsustainable? Kyle Bass, of Hayman Advisors LP, studied sovereign debt levels, the size of a country’s banking system, and government revenues to identify where debt levels cross over into “unsustainable” territory. The video below references Mr. Bass’ research, which identifies problem countries and the importance of their balance of trade.
With the holiday season kicking into full swing, low trading volume should create an environment where volatility will remain the order of the day. If the euro and U.S. dollar make some noise this week, it could get very interesting. All things being equal, a rally in the euro tends to be bullish for stocks (NYSEARCA:SPY) and commodities (NYSEARCA:DBC). If the greenback (NYSEARCA:UUP) continues to strengthen, conservative assets, such as Treasuries (NYSEARCA:TLT), and shorts (NYSEARCA:SH) will have the upper hand.
Courtesy of Chris Ciovacco, Ciovacco Capital
Posted with permission from author by Wall Street Sector Selector
About John Nyaradi (http://www.wallstreetsectorselector.com)
John Nyaradi is Publisher of Wall Street Sector Selector: Your Home For ETF Investing! John writes a weekly guest column, John Nyaradi’s ETF Edge for MarketWatch.com and his investment articles have appeared in many online publications including Trading Markets, Money Show, Yahoo Finance, Investors Insight, Fidelity, ETF Daily News, iStock Analyst , among many others. His book, Super Sectors: How to Outsmart the Market Using Sector Rotation and ETFs, is published by John Wiley and Sons and included among the Years Top Investment Books in the 2011 Stock Trader’s Almanac.