Macro-Catalyst: What six sectors will the European Central Bank move shortly?
Summary
This is a trade with a three month view.
Today at 13:45 at the ECB meets at its headquarters in the Kaiserstrasse 29 in Frankfurt. Its board is expected to cut the main interest rate one final time, by 25 basis points, to one percent. More importantly, it will announce whether to implement some "non-conventional" monetary measures that the Anglo-Saxons adopted last August. Using the American example, we tell you which sectors fared the best - and worst - off the Fed's moves last August.
We relate the sector rotation to the logic of our Economic Clock®.
We then tell you how to make money off this idea: six sectors will be moved by this macro catalyst of the ECB's decision to introduce "non-conventional" monetary measures.
Topics Covered
- What (probably) will happen
- What happened to six sectors in America
- How to make money off this macro catalyst
Background
1. What (probably) will happen
Today, in all likelihood the ECB will start adopting what yesterday's Financial Times (FT) , p. 7, dubbed "non-conventional" policies. We read in said pink rag that "On the table are options such as asset purchases, being deployed in the U.S. and elsewhere in a bid to unlock bottlenecks in the financial system - as in the market for corporate debt...where banks are holding back.
This call to arms is strong. According to said FT, the Eurozone will contract by 4% this year; that is worse than in the U.S. Besides, as we point out in our Economic Clock®, Europe's Economic Time® keeps worsening, courtesy of sluggish lending and little, if any, fiscal stimulus.
So the ECB has to do something beyond continuing to inflate the Eurozone's monetary base. Indeed, that base has exploded by 40% per annum for some months - but lending remains sluggish. Banks are scared. So are consumers.
2. What happened to six sectors in America
Recall that the Fed started buying bonds off the market back in August, 2008. But the market rose only as of this March.
This means that initially, all sectors in the stock market kept wilting: a falling tide depresses all boats, after all.
But as of this February, here are the three sectors that recovered the most in anticipation of a general improvement in the Economic Time®: "Consumer discretionary" rose the most, followed by "information technology" and by "materials"
- consumer discretionary (because when markets rise, the "feel good" factor drives people into pampering themselves, particularly after the market bludgeoning since 10/10/07);
- information technology (a sub-form of discretionary spending for computers, mobiles, games, TVs & stereos, so the above logic of the "feel good" factor applies), and
- materials (the feeling was that the Fed's massive liquidity injection would improve America's Economic Time®: demand would rise, so more materials would be needed with which to build homes and make machines.)
The following three sectors fared the worst. They fared the worst because people anticipated an improved Economic Time®, so they wanted to avoid "super safe stalwarts" that don't move with the cycle:
- energy (prices and profits are driven by global forces, so any improvement in the domestic economy will help profits only at the margin);
- health care (health has little to do with the economic cycle) , and
- utilities (see the above observation on "energy").
3. How to Make Money Off This Macro Catalyst
- Always consult your financial adviser first.
- Go long/ buy into stocks in these European sectors: consumer discretionary, IT and materials.
- Avoid or go short of these European sectors: energy, health care and utilities.
- Arbitrage the longs versus the shorts, the longs within the longs, or the shorts within the shorts.
