ETFs to Profit From a Possible Debt Solution

Today's Guest Post comes from the ETF Corner at (click here to visit original post). In this post, their "Guest Insights" contributor, John Nyaradi of Wall Street Sector Selector gives a fresh perspective on how select financial vehicles could benefit from the August 3rd debt solution deadline. Learn more about InvestorAlley and access a complimentary report, "Do Not Buy These 6 Stocks."

Investors, pundits and journalists alike have spent hours of research, television time and column inches speculating about the ramifications of a U.S. default or contagion from Greece spreading throughout the European Union.

Last week the EU was apparently successful in again kicking the can a bit farther down the road while the debate between Congress and the White House over deficit reduction goes way past the 11th hour for meeting the August 2nd deadline.

Everyone expects and assumes that the European Union will be able to save Greece and that our politicians will not take the United States and the world over the financial cliff of destruction. However, that still could very well happen which is why in previous columns we have discussed ETFs and strategies for that possibility.

But what if the US does not default and the EU can somehow rescue Greece? What should ETF investors do if, in fact, the world doesn't come to an end? The first indicator of how to approach August 3rd would likely pop up in how/when President Obama and Congress finally manage to patch up the debt ceiling debate. As mentioned last week, President Obama, the Fed, and the GOP controlled house have multiple Fingers in the Dike about what to do to fix the looming deficit ceiling and a sputtering economy.

Also last week, Moodys Investors Services threatened to place the US bond ratings on review for a possible downgrade, while Standard and Poor threatened to place the U.S. sovereign rating on CreditWatch with negative implications. The outcome of August 3rd likely relies on just what kind of deal Congress and the President strike.

Assuming that the debt ceiling is simply raised to stave off potential global catastrophe, investors can expect Trouble in Bond Land, as Moodys, Standard and Poors and the rest of the market are likely to punish Congress for not getting its fiscal house in order by finding a longer term solution. Simply raising the ceiling does not seem to be good enough anymore for investors, and so Bond ETFs like (IEF) iShares Barclays Treasury Bond 7-10 year ETF will likely experience turbulence until markets regain their confidence in the Federal Government.

However, should President Obama and Congress come to a broader, longer term deal, US Treasury Bonds could still serve their purpose as the safe haven for money, and continue their role as the best of the ugly. In spite of the current situation, if Congress and the President actually strike a deal that could fix the debt problem over the longer term, confidence could be restored in the all faithful US Treasury.

Across the Atlantic, the EU keeps trying to stop the Greek hemorrhage which, well, keeps hemorrhaging. Just last week the EU finally decided to release a 2nd bailout package for the troubled nation, consisting of 109 billion Euros. Assuming that solution is sound and works to clean up this mess, troubles still loom ahead in Italy and Spain. Therefore, ETFs to follow in Europe could include the iShares MSCI Spain Index ETF (EWP) and iShares MSCI Italy Index ETF (EWI). If the EU can stop contagion, these ETFs could be promising buys, while another flare up across the Atlantic could lead these countries into a terrifying freefall.

All in all, investors should be wary and aware of the dangers of our current environment. At home, any kind of a kick the can deal on deficit reduction is likely to be met by heavy punishment from the ratings agencies and the bond vigilantes, while in Europe, we can expect that there will be opportunities in the PIIGS, particularly Italy and Spain, no matter what the outcome of the containment efforts.

The bottom line: Investors should not assume anything, as the deals being hashed out on both sides of the Atlantic, no matter how promising, may not pan out according to plan. At the end of the day, any deals made will still have to deal with the current problems that just will not seem to go away.


If you like this article and would like to read more from, please feel free to visit this page for access to a complimentary report, "Do Not Buy These 6 Stocks."


***The views and opinions expressed in this post are that of the featured Guest Blogger. This post does not necessarily reflect the's own views. All trading involves a level of risk. Individuals should fully understand risks before entering the market. None of the information contained in this post should misconstrued as advice or any sort of solicitation to buy, sell or otherwise invest in any fund, company or security. ***

7 thoughts on “ETFs to Profit From a Possible Debt Solution

  1. There is no way to step on the government benefits hose.... without anarchy and exponential worsening of the crisis.... THE WORLD IS FLAT AND WAGES SHALL REFLECT THE LOW LABOR COSTS NO MATTER WHAT OUR WASHINGTON GANG TRIES! This far worse than a third rail... economic and financial collapse are unavoidable... NO GLOOM just reality. The world is flat and all boats shall drop with that recedhe ing pre tsunami tidal warning. The beach looks good and growing, and then come the waves of disaster.

  2. Don't bet on it, they will just kick the can down the road with no
    real resolution. any relief rally will be short lived.

  3. I've posted this scenario a few places, and others seem to like the reasoning.

    We get a debt deal. It probably stinks, but so many have such an interest in it, and our credit rating, that they squint until it looks OK.

    Market gets a decently large relief rally, while the PMs lose their fear premium.

    People then read the deal, and perhaps figure out that it's a pile of poo and we're in that pile with it. Market goes back down, PM's back up.

    Perhaps this could be timed that you go long the market on the cusp of the deal being announced, sell it and buy PMs with the money as soon as it turns...could be a real good trade for the year. But there are a number of things that could mess this timing up -- all those other slow motion train wrecks around the world - one might intrude at an inconvenient time.

    But this is what I'm watching for, sitting on a big pile of dry powder.

  4. I think immediate short term ETF's to play in case debt crisis gets resolved and market pops a boner would be TNA and SOXL

  5. Adam,

    How do you think TBT will pan out over the coming weeks?

    I bought a Jan 2012 Call with a $33 Strike price

    1. Zeledon,

      According to our Trade Triangle technology it looks like the overall long-term downtrend will continue for TBT for the foreseeable future. We are looking for a trend reversal to the long side @ the 36.00 level.


  6. Long term plans have not worked in the past and 99.99% won't work now. They end up doing the borrow and spend now and the future cuts never happen. So a short term or 1 year deal with real cuts now may be the only hope for actually getting the spending and debt under control. FWIW

Comments are closed.