ETF Expert

On Thursday, June 4, the market pieced together its second consecutive day of gains for the first time in nearly 5 weeks. Yet in was premature optimism for a Friday, June 5 “Jobs Report” that sparked extraordinary pessimism.

Down volume surpassed up volume by 10 to 1. Losses topped 3% for most industry segments and market caps. Worse yet, few folks seemed capable of shaking the fear that Europe is falling apart.

Yet I would still argue that the volatility is more indicative of hedge fund liquidation. Sell the long positions on up days… sell the short positions on down days. Hedge funds want to raise more cash. (Review “How Hedge Fund Trading Affects Your ETFs.”)

After all, one could easily make a case for positives within the job report itself. The average hourly work week continues to trend higher, meaning that demand for workers is increasing (even if it’s going to existing employees or temps). Average hourly income was higher as well, suggesting that the same employees are making more money and have more money to spend.

Well… Mr. Market didn’t want to hear any of it. The country has spent a fortune on job creation and very little in the way of job creation has occurred. Making matters exponentially worse, European banks and individual countries seem to be stuck with troubled assets of their own.

Where’s their TARP solution? And could stock assets be any more antsy about the ongoing stream of European tragedies… from Greece to Spain to Hungary? Hungary’s not even a member of the infamous PIIGS!!!

I did notice a rather remarkable level of interest in one asset class, emerging market bonds. For example, the iShares JP Morgan Bond ETF (EMB) received an inflow of $85 million in spite of a drop of nearly 0.5% for the day. The inflow represented a nearly 6% jump in the fund’s assets under management and it occurred on 10x the normal trading volume.

It may seem ironic that a fund exposed to the debt of Russia, Turkey, Lebanon and the Philippines is regarded with greater affection than the debt of developed nations in Europe… but that’s exactly what’s occurring. Emerging nations are being viewed as creditor nations, even with a past history of default; meanwhile, a number of developed countries are viewed as debtor nations with an inability to service future debt.

I don’t know how eager anyone should be for 5.5% yields on below-investment grade rated debt. Keep in mind, both iShares JP Morgan Bond ETF (EMB) and PowerShares Emerging Market Debt (PCY) collapsed on the May 6, 2010 “Flash Crash.”

However, it’s difficult to poke holes in the logic that emerging market countries are more capable of servicing their debt levels. The income stream may be a bit on the low side, but emerging market bonds represent a non-correlating asset class to world equities. (Review “Emerging Market Bond ETFs: Diversification And An Income Stream.”)

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