| Main | 

Slumping LIBOR Rates Favor Wild-N-Crazy European ETFs

06 February 2012 at 2:37 pm by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

There’s been a great deal of discussion about the NASDAQ’s ability to log an 11-year high this past week. What hasn’t been mentioned, however, is that the tech-heavy composite remains 42.5% below its 12-year high. In fact, the composite would need¬†to pole vault¬†74% from the current 11-year peak to recover the losses incurred from¬†the¬†bursting of the dot-com balloon in March of 2000.

I realize that I am¬†raining on the NASDAQ’s parade, just as the world begins to clamor for IPO shares of Facebook (FB).¬†Perhaps ironically, I see tremendous value¬†in¬†some areas of tech, even at these 11-year highs. That said, one reason to bring up¬†the technology bubble is to examine¬†the current standing¬†of another — the credit bubble.

Financial institutions are struggling to demonstrate profitability and revenue growth due to an inability/unwillingness to lend. Equally damaging, banks holding toxic assets (e.g., securitized subprime mortgages, junk sovereign debt, etc.) have unattractive balance sheets; many investors refuse to go anywhere near bank stock.

Should we really be “talking up”¬†the 30%-plus gains for the SPDR¬†Select Sector Financials (XLF) since early October? Or should we¬†take notice of the reality that¬†XLF is still down¬†a staggering¬†60% from 5 years ago? Keep in mind, that 60% drawdown will require 150% gains to get back to the starting gate.


Typically, I avoid making “crystal ball” prognostications. Yet¬†debt-to-GDP ratios for industrialized sovereign states as well as the need for developed world households to deleverage¬†will continue to cloud the outlook for¬†banks for years.¬†I see parallels to investor fear of tech stocks after 2000-2002; it has taken a decade for investors to come back to tech with conviction and I wouldn’t expect them to return to¬†financials with conviction until 2017.

Traders? They’re another story. In fact, as much as I prefer to limit common stock exposure to financials, there are several technical signs that¬†may favor¬†traders who are willing to nibble at iShares Europe Financial Sector (EUFN).

For one thing, European banks are finally starting to trust each other again. Since July, I have talked ad nauseum about the ever-climbing 3-month LIBOR. Back in August of 2011, I discussed LIBOR yields rising from 0.25 to 0.29. In September, LIBOR had reached 0.34; 3-month LIBOR hit .40 in October. Heck, it kept right on going through the first week of 2012 to plateau near .58!

Like magic, or quasi-European accord,¬†the rate has steadily dropped ever since the first week of the new year. If 3-month LIBOR rates — the rate European banks charge one another to borrow money — closes below .485, one could readily assume that European financial firms could profit from money-making endeavors (e.g., consumer loans, business loans, etc.).

LIBOR 3 Month

Secondly, the current price of EUFN is well above a 50-day moving average. I would expect EUFN to pull back several percentage points to potentially test its 50-day on the downside. If EUFN passes the test and bounces higher, a trader could look to capitalize in an environment where 3-month LIBOR rates are trending lower.


You can listen to the ETF Expert Radio Show ‚ÄúLIVE‚ÄĚ, via podcast or on your iPod. You can follow me on Twitter @ETFexpert.

Disclosure Statement: ETF Expert¬†is a web log (‚ÄĚblog‚ÄĚ) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert disclosure details here.

Be Sociable, Share!

Tags | , , , ,

Receive ETF Expert Daily By Email

Leave a Reply

Free Sign-Up                     ETF Expert RSS Feed  Follow EtfExpert on Twitter

Receive ETF Expert Daily By Email
Get The Weekly ETF Expert Newsletter