Question… If Europe agrees to spend money to stimulate growth, but fails to come to an agreement on how to bailout the European Union, how is that good? The late day rally on Thursday came on the rumor that something was being worked out in the Summit. However, no one really knew what had been worked out, nor if it was really a solution, but they were willing to buy stocks on the hope it was viable. Wow, what has investing come to? Are we really that shallow that rumors will move stocks up more than 1% in thirty minutes? Don’t answer that question! Nonetheless here we are scratching our collective heads over the Supreme Court decision, European rumors and hoping that all is going to be okay. Happy end of the month, quarter and first half the year.
The news this morning is the European Union has voted to approve a 120 billion euro spending on growth to boost economies in vulnerable countries, and allow the euro zone rescue fund to recapitalize the faltering banking sector. The news pushed stocks higher in Europe and Asia (and the US on the rumor). Excuse my ignorance, but the US has spent nearly 3 trillion dollars to stimulate growth in our vulnerable country and our GDP was 1.9% in the first quarter. How will 120 billion euros change the direction for the euro zone? The agreement to allow banks to tap into the rescue fund is similar to Obama approving TARP to bailout Chrysler and GM. Yes, stocks are higher in Europe today, but at what cost and where is the real plan for recovery? Oops, sorry, wow this really is great that Europe is doing something, lets buy some stocks on the news! :))
The Supreme Court decision on healthcare was bound to raise more questions than provide answers. The challenge comes with a different set of questions than most were expecting. I have no interest in speculating or bashing the decision, what I will say is it becomes another piece of the longer term worries we discussed in yesterday’s notes. Europe, earnings and the consumer now have the added burden of understanding the impact of a 1.3 trillion dollar tax (yes, we can now call it a tax) on the consumer, both good and bad. The last quarter has been like the story line to the movie “Jaws”. Each time you think it is safe to head back into the water the theme song starts playing. Will the healthcare bill impact jobs, small businesses, the economy, etc. Will the impact be good, bad or indifferent? These are all legitimate questions and at this point any answers would be pure speculation. In the coming weeks and months the outcome will gain clarity and we will have direction for how to put our money to work in the sector.
What is the market saying now? The simple answer is confusion! The up and down movement based on the news of the day is keeping investors on the sidelines or standing pat with their holdings as this settles out. If we do gain clarity relative to Europe short term, and the solution or agreement today from the Summit, will help stocks long term, not just today. Some believe that after time to digest the healthcare bill again, it will be favorable for the sector and jobs. Put those two solutions together and we could see a drift higher for the summer. However, that is a really big IF. Again we have to put everything in perspective to the short term horizon that investors are focused on currently. The longer term picture remains very cloudy at best. Our focus now shifts to the last half of the year.
What opportunities if any are there now?
Financials bounced back nicely showing support from buyers as the sector closed flat on the day after testing support at the lows on Thursday. XLF, SPDRs Financial ETF needs to hold above the $14.25 mark to keep my interest short term. KBE, SPDR Bank ETF bounce back to $21.50 on the close and remains part of the sector to watch near term. KIE, SPDR Insurance ETF bounced as well back near $40 and could be interesting on the settlement of the healthcare debate. This is one sector that stands to benefit short term on positive resolutions to Thusrsday’s concerns with healthcare and Europe.
Healthcare quickly divided into the haves, and the have nots. The providers jumped on the news and the drug and medical devices fell. At the end of the day it was a matter of who and what investors thought would benefit, and who they thought would suffer. This is where the opportunity will be longer term determining exactly who wins and who loses. One thing we do know, the 1.3 trillion dollar it will cost will be far more than anyone expects going forward, and the bill does nothing to lower the cost of the delivery of quality healthcare. XLV, IHF, IHI and XPH are the ETFs to track for the sector. Remember, where ever there is a rising cost look to invest in order to afford the service or product in the future. Gasoline is a example of this fact. Healthcare is not different now.
IEV, iShares Europe ETF will bounce on the news today. Is this a opportunity to put money to work in the countries rebound? A move back above $32.40 is positive and $33.50 is better. Watch for a target move of $34.70 short term on the news. If it stays or moves higher is a determination of the outcome. The more speculative trade would be in Spain (EWP) and Italy (EWI) on the bounce induced by an announcement of yet another solution in Europe.
Enjoy the day – it promises to provide some entertainment. However, the real solution to the issues in healthcare and Europe will be longer term and it is worthy of our time to determine who, where and what the winners will be.
Have a great weekend.