Another Greek Drama and Making the Case for the Slow Horse

After a week like we’ve just had, with the S&P 500 pulling back 3.5% to close at its lows and almost given up the 2000 level, I bet you’re starting to think managing your equity allocation ahead of the year end isn’t such a bad idea after all. So where do you think the odds on favorites are going to be found in 2015? Given my known preference for increasing my European equity exposure in 2015, you’re starting to wonder just what the heck the Yinzer Analyst has been up to all week. Maybe spending too much time sampling the goods at our own local micro-distillery?

Why do I feel so optimistic about Europe? Did this week’s almost 5.5% pullback for the iShares MSCI EMU Index (EZU) ETF lower the damper on my fire? To be honest, this pullback helped ease my biggest concern about investing in Europe, that valuations were already sky high as investors anticipated the ECB’s upcoming QE program. First let’s look at the charts to breakdown this week’s price action.

First things first, let’s take a look at a chart of the most common ETF offering pure Greek-exposure, the Global FTSE Greece 20 ETF (GREK.)  Now study the chart carefully and tell me what you see.

GREKCould it be the fact that GREK has been steadily underperforming EZU since last spring?  From the high of June 6th to today, GREK is down 42.96% to the 14.72% loss for EZU.  Yeah, the chart above is the tame one but I like it because it shows the incredible volatility of GREK.  In fact, ETFG had it ranked on 12/5 with close to it’s highest short interest as a % of the free float and implied volatility in it’s history.  This thing, is to quote Gwen Stefani, bananas.  So the fact that Greece is a financial/market basket case is hardly news to anyone who’s been paying attention.

Now getting serious, let’s start off by checking out the hometown team using SPY as our proxy for domestic equity markets.  When I started this post on Thursday night I didn’t think we’d crack $202 so quickly if at all, but SPY plowed right through it late in the day to close just off the low on heavy volume with the price eliminating the divergence that had been forming with a steadily falling CMF (20) score since late November.

SPYIf you think that looks bad, avert your gaze from the drama in Europe where EZU also closed at the lows of the day, breaking through the support line around $37.75 and looking to challenge the downtrend line at $36.  The global risk-off trade didn’t help the situation, but the negative correlation with a rising FXE certainly did it’s part to pull a Harding on EZU.


fxeThe situation looks no better on a weekly basis as the global rout signaled everyone holding a long position with a $38-$39 entry point from the fall of 2013 that it was time to take the money and run.  Having cracked the weekly downtrend line, the next likely stop is going to be at $35.75-$35.90.

EZUWeeklyWhat about relative momentum versus SPY?:

REL MOM WEKYou can see that for a brief period this week, EZU outperformed SPY to the point where it broke the downtrend line before concerns over the Greek contagion lead to a hard rout of European stocks. Try looking at the same chart on a daily basis.  You can see that try as it might, EZU can’t quite overcome the 50 day moving average.

50 DAYSo given the glum charts, why am I still so positive on Europe.  First it’s because despite the fact that Baron Rothschild never said anything about buying when there’s blood in the street, it’s still really really good advice to follow.  What do you think is the most important determinant to long-term returns?  It’s not technological growth or demographics or how quickly the money supply is growing, it’s the price you paid for the investment in the first place.

Ever since Draghi’s comments in early November about doing whatever it takes to expand the balance sheet, there’s been a steady stream of positive news reports from the ECB coupled with negative Eurozone economic developments that reinforce the need for additional monetary and fiscal actions to help combat a deflationary environment. The real question is whether the situation in Greece is significant enough to derail 2+ years of progress in combating the prolonged economic weakness Europe has endured. Honestly, doesn’t it feel like a story you’ve already heard before? Political uncertainty in Greece threatens existence of EU? Not quite as old as the Odyssey or even Oedipus Rex, but it has a familiar ring. My own theory is that all its done has been to shake out the weak hands (as much as I hate this expression) and restore valuations to a somewhat more attractive level. At the start of the week EZU has a trailing P/E multiple close to 18 and in the top decile of its prior trade history. According to ETFG the recent rout has pushed it’s valuations closer to historical median but I’d like to see a little more bleeding and improved momentum first.

Before you rush out to buy EZU or broader VGK, the latest Greek tragedy will play out over the rest of December which means that EZU could be retesting the $35-$37 range soon. But my investment thesis on Europe has more to do with long-term trends than technical or valuations.

The Case for the Slow Horse:

I’ve been of the opinion that the EU has been a slow-motion train wreck largely of its own making. Between an unwieldy monetary union, finance ministers who still think currency markets operate the way they did during the era of “golden fetters” and an obsession with debt-to-gdp ratio’s, Europe pretty much got everything wrong between 2008 and 2012. While heavily criticized at the time, the American decision to focus on saving the banking sector in 2009 to avert a loss of confidence following the forced mergers of 2008 proved to be the correct one. Thanks to Fed largesse and a change in mark-to-market accounting, the day of reckoning for American financial institutions was postponed until they were able to successful restructure their balance sheets and restore confidence that they were going concerns. Coupled with the American Recovery and Reinvestment Act of 2009 along with the on-going confidence lift from the QE programs, America was able to limp along until such time as it seemed that economic growth could be self-sustaining.

Contrast this with the situation in Europe where the response to the crisis was modeled on the Japanese approach of the last 20 years, incrementalism and subtly akin to Lyndon Johnson’s approach to Vietnam. Lacking a unified banking regulator, there was no consistent policy in place for backstopping weak financial institutions; instead the focus was on improving their financial condition by eliminating riskier debt and raising additional capital to comply with Basel III choking off what little lending there had been while doing nothing to address the concerns over their financial safety. Now European financial institutions are very well-capitalized, but with low loan demand and no prospect for NIM growth. And without a federal structure, the EU had no ability to effectively deliver stimulus aid where it was needed to resolve fiscal in balances instead forcing highly indebted EU nations to raise taxes and cut spending, the exact opposite of the Keynesian response typically employed during a recession.

As anticipated, economic growth weakened to nothing raising the specter of default, increasing volatility and forcing EU financial institutions to unload supposedly safe sovereign debt, igniting the Euro Bond Crisis of 2012. Only the addition of “Say Anything” Draghi as the head of the European Central Bank and the realization by German politicians of how close to the brink they were helped ease tensions within the Eurozone while also simultaneously restoring confidence. From the low point of the Eurocrisis in 2012 to the this summer, the iShares MSCI EMU index performed in line with the S&P 500.

So why am I taking the time now to dredge up what in this day is considered to be ancient history? Because the policy differences between the U.S. and Europe are set to become even more extreme and this time, the Europeans might be the ones with the better hand to play and that differential could mean all the difference for expected returns going forward.

We don’t need to sit down and derive the Kalecki-Levy profit equation from Macroeconomics 1 to understand that one of the biggest drivers of corporate profits over the last five years has been the Federal budget deficit. Although the steady decline in government hiring and spending has been acting as a drag when figured into GDP calculations, government spending has been a major boost to the economic recovery despite what you might hear on Fox News. Even though there are no truly “closed” economies, remember that government spending becomes private saving so government deficits are a source of revenue to the private sector while the federal surpluses of the late 1990’s withdrew capital from the economy. In fact, the on-going fight over federal spending and the infamous sequestration battle of 20XX were cited by Ben Bernanke as one of the reasons for Quantitative Easing in the first place even though he knew that loose monetary policy could only do so much to counteract fiscal tightening.

How this pertains to our current situation is that even with the recent swap in Congressional leadership, U.S. fiscal deficits are projected to remain fairly narrow at 3% or less of GDP for the next decade, removing a potent source for corporate profit growth. And while they may have narrowed substantially over the years, another source for profit growth, personal savings, is already close to historic lows. In 2012, personal savings bounced back above 7% before running even higher into the end of the year as companies rushed out special dividends ahead of the change in legislation from Bush-era on lower dividend tax rates. Since then, personal savings rates have hovered between a low of 4.1% to 5.3% (October was 5%) offering little hope of further profit stimulus from this quarter.

This leaves dividends and investments to help generate the profit growth necessary for the S&P to continue advancing but with dividend payouts and share buybacks already running at 95% (or over 100% depending on the source) of trailing earnings, there’s little room left for further growth unless earnings accelerate or more debt is added to finance them. But then what capital is available for further investments? Real gross private domestic investment is already running around a 4.9% year-over-year rate of change and while that’s above the 2% lows from late 2012 and early 2013, it’s down from the 8.7% level of 4Q 2013. That only leaves net exports and with a rising dollar and falling oil prices/falling oil demand, what’s the outlook for U.S. exports except for passenger jets and military equipment?

So does that mean there’s going to be zero profit growth in the immediate future? Not at all, if just means that any growth will be more limited for the immediate future. At the close of 2013, analysts surveyed by S&P estimated 2014’s earnings would grow nearly 28%, by 9/30/14 there were estimating instead they would grow 21%. So far, the 3Q/13 to 3Q/14 growth rate has been 12.3% with Factset reporting expectations for 4Q are already declined to 3%. If earnings growth does come in that low, the full 2014 earnings for the year will be less than 9%. Depending on where we close, it’s possible than 100% of the full years return will be driven by earnings growth rather than multiple growth. Where does that leave 2015? If the trailing multiple were simple to go from the current 19.5 to 17 and earnings grow 10%, we’re nearly fully valued for 2015.

European Contrasts:

And is Europe in such a vastly better condition you ask? No, but their position in the business or sentiment cycle is much better than ours. From my point of view:

  1. ECB Commitment to Expanding the Balance Sheet: This is the key, they’ve already agreed to a $1 trillion expansion and I agree with Andrew Smithers at FT, this isn’t nearly enough. Does that mean it’ll fail? No, they will just have to keep committing to more and more programs until it works. Sound familiar? If they did just that, it would be QE 2 and QE 3 all over again.
  2. Euro Destruction: The Euro has already moved south to the tune of 10.4% since May 5th and while the Greek anxiety has some covering short Euro positions waiting for the inevitable announcement of a new backstop to send it higher, any move to expand their balance sheet while the Fed stops expanding theirs could send the Euro lower. Besides improving the short-term Euro outlook, it acts as a major boost on corporate earnings. A Reuters piece on September 5th estimated that the then 5% drop in the Euro could lift corporate earnings 3%-6%.
  3. Loosening up the belt: After years of cutting spending and raising taxes, Eurozone leaders seem to be coming to grasp with the idea that they only way they can maintain target debt-to-GDP ratio’s is to focus on growing GDP and not Germany’s fixation on belt tightening. Never having reached the deficit depths descended to by the U.S., the Eurozone aggregate deficit in 2013 was only 2.9% with only France and Spain exceeding that average for the year. While government finances are relatively stable, the on-going tepid growth of the Eurozone, when contrasted either with the U.S. or the EU nations with a free-floating currency is astounding. While it’s irresponsible to think that this will change overnight, the recent discussions of new infrastructure and stimulus funds is a marked change from the recent past either in Europe or the U.S.

So if you were to ask me why, when presented with the choice of a long-time winner that looks a little sluggish and at terrible odds or a perennially also-ran that’s fighting the trainer and offering better payouts, why wouldn’t I take that bet?

Saying Anything Part Deux?

Ask any of my co-workers and they’ll tell you that I’ve been the biggest cheerleader for investing in Europe since 2012 and while It’s been nearly two weeks since the last post devoted to Europe; I slook at yesterday’s big move in European-oriented ETF’s as a lot of energy expended on Mr. “Say Anything” Draghi and an investor sentiment survey. Having some capital to put to work, I’m very tempted to load up on some Eurostock exposure, but instead I’m going to pull a Costanza and not do anything. It’s very easy to get caught in the excitement over the sector starting to show signs of life, now is precisely the time when it pays to take a step back and instead of selling my mint-condition G.I. U.S.S. Flagg carrier so I can buy more EZU I need to decide what my targets should be and what I expect for this position.I know, totally Debbie Downer. But I’ve fallen in love with Europe before and been burned, so this time, we’re going to have some ground rules baby.


  • Momentum is improving: Both on an absolute basis compared to its recent history as well as versus the S&P 500, Euro stock sentiment is heading in the right direction. Looking strictly at EZU’s history, two weeks ago the ETF was literally at rock bottom. Both the short and long term rankings were so low they didn’t deserve a percentile score and worst yet; it had been that way for some time. Momentum, like volatility, tends to persist so winners will continue winning and losers losing until the trend changes. When you’re winning, low rankings tend to be followed by positive performance over a certain time frame, in the case of EZU, it was followed by more losses. But there may have been a trend change and momentum scores are just to the median indicating that more gains, however marginal, could be had.  On a relative basis, EZU has broken the downtrend line that formed in September and while I’d like to see a retest of the line to see if EZU can stay above it, the situation is improving. On a longer-term basis, we’re still in a downtrend channel which is why I’m reserving judgment on whether there has been a major trend change.ezuspy2ezuspy
  • U.S. Stocks are overbought: With today’s strong large-cap performance, the S&P 500 has crossed the 70 threshold for the RSI 14 score while short-term momentum scores have pushed all the back to the 100th percentile. Longer term scores are still outside the top quartile, but only just and the overall momentum rankings haven’t been this high since early June. Doesn’t mean the situation is going to reverse, but U.S. stocks are way too strong and need a cooling off and opening up the possibility for spill-over to other regions.SPY
  • Seasonality: Speaking from personal experience, late November and early December are the prime-times for strategic allocators to start reviewing their allocations and making changes. Typically those were done in the last two weeks of December but the light volume has pushed a lot of that into early December. After the mixed year, the annual re-balancing from U.S. out-performers to Euro under-performers won’t be as strong as last year but some of the big sell-side firms are raising their targets for Eurozone stocks versus the U.S. so we could see major strategic shifts.
  • Long Term Monetary Situation: Probably the most overused argument for investing in Europe (and I should know, I’ve used it like a thousand times) is that at some point, the ECB will HAVE to start expanding their balance sheet and be aggressive about it. With the balance sheet back to 2012 levels, Europe is suffering from a major shortage of walking-around-with money (not actual currency) and will have to start throwing everything including the kitchen sink at the problem. Normally I’d say that this argument carries as much weight as “demographics” but I know it to be true and compared to the U.S. which is undergoing a form monetary tightening and potentially more fiscal tightening next year, I still say invest where the money is cheaper or going to be.


  • Valuations are Rich: That whole, “they have to start printing argument” that everyone uses? Well EVERYONE has heard it already invested so from a valuation standpoint, most Europe oriented ETF’s are already seriously overbought and trading at extreme valuations. That’s always the downside of waiting or worse yet, following the herd. The best time to buy European stocks was in 2012. Now you should be adding to positions, not taking on whole new ones. If you looked at the most recent factsheet on the iShares website, EZU had a trailing 12 month p/e of 22 as of 10.31, pretty rich compared to the S&P 500 at a little over 19. Compared to prior history, if you haven’t done so yet, sign up for a free trial at (note, the author isn’t paid by them, he just thinks they’re really cool) and then go type “EZU” into their quant screener. Under fundamentals, you’ll see their P/E ratio close to historic highs.
  • Since when do fundamentals really matter? It’s been a while, I’ll grant you that. My concern is that if the ECB finally does s%$t instead of getting off the pot, the losers will be anyone who buys more equities at these levels. Remember the run up EWJ had in early 2013 after the announcement of “Abenomics?” It peaked in May of 2013 and then started consolidating and didn’t see that old high until the summer of 2014 and has only been above it briefly since. U.S stocks had a similar experience in May of 2010 after the bottoming out in 2009 where we had to consolidate and let earnings catch up to prices which didn’t happen until October of 2011 by when the P/E ratio had fallen over 30%.
  • Short Term Technical Outlook: So on a daily chart; EZU has just PLOWED through another downtrend line from September and ran smack into prior support right at the high of the day. The real question is how much strength it has to push higher? And it has to do it Wednesday because EZU is literally sitting on the downtrend line. So it pushes higher, clears resistance and then hopefully cools off to retest it, breaks down, or literally goes nowhere. Sounds like we might have a chance to buy at a better price than Tuesday’s close.ezuD
  • Political Reality: Listen, I love Mario Draghi as much as the next man. He’s the real super Mario in my book and he’s vying for my #1 central banker spot with Stanley Fisher, but the man can only do so much with what he’s given. This isn’t Washington where the Chairman rules with an iron first; only the Germans can do that and they still don’t want to play ball. Draghi will have several more opportunities to jawbone the market before the end of the year but for me, the proof is in the pudding.

So far ECB covered bond purchases have amounted to a whopping 10.5 billion Euro’s which compared to the Federal Reserve is like bringing a knife to gun fight. Asset backed purchases should start this week but total issuance per in the first 3 quarters of 2014 was something like 154 billion euro’s….in 2008 it was over 800 and most are retained by the banks to use as collateral for loans. So they only way the ECB can buy what it intends would be for banks to issue hundreds of billions more…by extending loans (that they don’t want to make) and only to the highest quality buyers (who don’t want them) because that’s all the ECB will buy.

So when does the recovery start again? I stand by what I’ve said before; until Germany begins to feel some real economic pain, they have no incentive to make quick changes to their views on ECB policy and with the latest ZEW survey results, I’m sure they think the pressure is off.

For me, the next couple of days are going to be crucial. I think the recent experience with Japanese and Chinese ETF’s and their strong and unexpected performance reminds me of a great lesson I learned at my last employer. We were discussing a certain investment and someone said, “yeah, but I can’t see what the catalyst is going to be that drives it higher from here?” Does anyone EVER actually know exactly what the catalyst is going to be…ever?

If you were playing the long game in late 2013, you would have been thinking that China wouldn’t let their financial sector collapse, especially in the midst of a regime change. It was a tough quarter but after an inverse head and shoulders pattern, the Shanghai exchange took off and never looked back and is still outperforming the S&P 500 by around 500 bps in 2014. And who can keep up with the latest political machinations out of Japan but after the slowdown from their retail tax increase, it was predictable that more QE would be the solution (for investors anyway.)  And for all the wailing about European lagging America, from July 2012 up until this summer EZU was actually outperforming the S&P 500, it was only after the latest weakness that Europe lagged and is now performing in-line with domestic equities.


Trading Strategies:

ezu3If you’re really determined to buy some Europe and don’t want to check out some great mutual fund managers, I’d say it’s hard to go wrong with good old EZU. Like I said, EZU is literally stuck between Scylla and Charybdis or in this case, prior support turned resistance and the downtrend line that held it back for so long. Best case, it breaks through $38, makes a push towards $40 where it fails and falls back to hold at $38. It would be a lot easier to be confident about EZU then, especially if it diverged from Japanese and U.S. sentiment, preferably by outperforming on the downside.

Given the amount of volatility we’ve seen in 2014 and the distinct possibility that everything coming from Frankfurt is hot air, I’m also inclined to keep my eyes on a new offering from iShares, the iShares MSCI Europe Minimum Volatility ETF (EUMV.) It’s a relatively recent offering with a limited track record and thinly traded compared to EZU but according to it was down 2.44% over the trailing three months and up 6% in the trailing one month compared to down 4.26% and up 5% for EZU. Not a huge fan of “smart beta” strategies and low vol only works when market volatility is high like in 2011 or 2014, but assuming Europe doesn’t have its act together, this could be a winner.

ECB Governing Council – Say Anything

Draghi1Another day, another Central Bank meeting that ends in more pillow talk from central bankers, this time from the second mostly widely known Italian with the first name Mario. Saying that expectations were supposedly low going into the meeting would be a massive understatement. First of all, the new covered bond buying program is only a month old and secondly, this is the ECB we’re talking about. As prior history has shown, outside of an existential crisis they prefer to debate rather than to do. As most ECB watchers laid out, the sole determinant of success for this meeting was whether that the Governing Council somehow managed to stay united behind a single objective and leader instead of revolting against Draghi’s management style of making promises and then expecting you to deliver. It’s a pretty darned low bar and investors, including yours truly, might just about be at the breaking point.

Now why should I be so upset by this? I’m a rationale and seemingly educated human being who knows the main job of any central banker is to present the image of a well-meaning bureaucrat who’s monetary measures can help stimulate the economy while actually avoiding doing anything at all until their hands are forced. Using that logic, Draghi and the ECB have done a magnificent job up until this summer, heck even better than the Federal Reserve. From July 10th 2012, the day when Draghi promised to do everything and anything to save the Euro, to say July 10th, 2014 the iShares EMU Index (EZU) rose over 64% while the S&P 500 was up 45% and what makes it truly impressive is that it was entirely a confidence move with no follow-through. Ben Bernanke had to deliver multiple monetary easing operations in an effort to boost the FED balance sheet and instill confidence. Draghi mostly just made promises that the German’s have managed to tie up in various constitutional courts for the last 18 months while the EU balance sheet continues to contract. Pretty darn impressive if you ask me. Draghi might be the real Super Mario.


But since July 11th, 2014, the situation has deteriorated and badly with the S&P 500 up 3.23% while EZU is down 10.44%. What’s holding back the Eurozone and setting it up for long downward deflationary spiral like Japan in the pick-a-decade? YfHdABdThose dastardly Germans of course! Remember, Germany is following one of the most basic economic growth models; restrain wages to increase competitiveness, grow your economy through exports (something to the tune of 50% of GDP) and hope that your citizens never actually start to spend some portion of their savings. Think China with really good domestic beers. Following the economic slowdown that was reunification, Germany updated its model and became a leading proponent of the Eurozone single currency plan for a number of simple reasons:

1. To sell more to their southern neighbors. With a common currency and common monetary policy, the southern EU members could borrow at historically low rates and the common market/currency made German exports more attractive.
2. As the largest economy in the EU, Germany has disproportionate influence on the ECB so there was no real control over German monetary policy being given up.
3. By running a capital account surplus, the Germans have accumulated capital to use as leverage against other EU states. Be good or Germany won’t loosen the purse strings. Remember, they have ALL the money. Yes, that’s a gross understatement but just roll with it.
Those diabolical Germans. I guess the Simpsons had it right after all. And what changed this summer? Yes there’s Vladimir Putin and the prospect for lost sales to Russia, there’s the continuing weakness in the PIIGS as Italy slips into another recession. The Scottish referendum and concerns over the UK departing from the Eurozone didn’t help. But really, what happened is that German growth began to falter as a strong Euro, low unemployment and modest wage growth led Germans to actually begin IMPORTING more than they export to the rest of the world, lowering their current account surplus. The fiends. Of course, that’s exactly what’s supposed to happen when you run a current account surplus (else how are they supposed to get the Euro’s to buy your goods) but don’t tell the Germans. Remember, they’re still afraid of hyperinflation.

So why did I go through all of this? To illustrate a few core concepts that I think are necessary to guide any European trading strategy:

  1. The chances of the northern states forming a new “Northern” Euro or a return to the DM are zilch. A new DM would skyrocket against a rump Euro made up of the southern states, making German goods incredibly expensive.
  2. So Germany has the most to gain by continuing the current economic arrangement, hence their intransigence (had to look that one up) within the ECB Governing Council. The concerns over hyperinflation are just a false flag to cover their true motives.
  3. Germany will try to continue its export-driven policies that have worked for decades and a weaker Euro will appear to be the key to that.
  4. Given that, it’s likely that the Euro will continue to weaken but survive, with Draghi waiting for another crisis point to force the hand of the ECB council into agreeing with anything he says.
  5. Germany will try to huff and puff but recognizes that they have the most to lose if a coalition of France, Italy and Spain join to ease monetary and fiscal policy within the EU. You’ve seen Merkel back down before when confronted about austerity measures even to the point of agreeing to “ease” targets and underwrite small business loan schemes. In the event that the UK decides to hold its referendum and leave the EU (since they foot an increasingly large portion of the EU budget, this is likely), Germany will have no choice but to back down.

So where does that leave us? In the worst place of all, with the status quo remaining as it is until another deflation crisis begins.

Short-Term Trade Ideas:
So just to broad stroke some ideas let’s start with a common denominator, Euro weakness. With the common currency seemingly stuck in a very long-term symmetrical triangle pattern, negative investor sentiment and with most Euro institutions and leaders devoted to weakening the currency; it’s hard to find a potential catalyst to push it higher with the possible exception of short Euro positions being back to their July 2012 highs. In fact, if you had shorted the Euro on 7/11/14 or just bought the Proshares Short Euro ETF (EUO) you’d be sitting on a 9.76% gain at this point. But with all the potential for weakness, I’d be hesitant about shorting the Euro for an extended trade.

Start by looking at the daily chart of FXE below. The Euro seems stuck in a downtrend channel and given the amount of pressure it’s under, I’m concerned it would only take a small rally to get a lot of short covering so I’d like to see a failed attempt to breakout around the $125 before going long with EUO.


On a weekly chart, you can see FXE is almost back to the 2012 lows with no more prior support to help prop FXE up before hitting the $120 level. I wouldn’t be surprised if there’s a bounce of some kind at these levels with prior support around $126 acting as a natural resistance point. An even longer-term chart of the last six years shows us in a possible symmetrical triangle pattern and about to hit the lower bound. Without a major negative catalyst, like another German minister talking out of turn about new budget cuts for pick-a-nation, I think a bounce is in order.



What about equities? While we all hold our breaths on whether the ECB will come up with another plan the German’s can object to, if there is a confidence booster in the Eurozone you might see a Euro rally meaning the time to have your European equity positions in dollar hedged ETF’s like the Wisdom Tree Europe Hedged Equity ETF (HEDJ) are numbered. While HEDJ has held in better than EZU since the summer sell-off, during the great 2012-2014 run-up, EZU gained 64.28% while HEDJ was up 40.30%. There are times you want that currency return, even if just temporarily and in this case, it’ll be temporary. We’ve seen a noticeable breakdown in the historically positive correlation between the Euro (here using FXE) and EZU. If equity sentiment improves, there’s a reasonable case to be made it’ll be on the back of a weakened Euro a la Japan in 2014.



But looking at the straight picture without worrying about currencies; while European stocks could be setting up for a momentum turn around against the S&P 500 (probably off annual reallocation’s here at home), it’s hard to see a short-term catalyst to change the picture.  On a daily basis, EZU looks to be losing steam after today’s as-expected ECB press conference without challenging either the down-trend line around $37.50 let alone overhead resistance at $38 while hedged HEDJ gained .89% on the day.

For my two cents; I’d wait for FXE to bottom out and make signals like it’s ready for a push higher.  If FXE blows through $125, close out a short Euro, long HEDJ trade and be ready to plow back into good ole EZU if FXE can find the energy to get back above $126 and stay there.  If it fails, it’s reasonable to assume FXE will then be retesting $120 and there’s no reason to hold long unhedged equity positions or currency exposure for that pain trade.  But if we do get back about $126, it’d also be reasonable to assume there’s a confidence booster of some kind at play and unhedged equity exposure via EZU could be just the ticket.