Warning Bells On Cypress Continue to Toll for Investors

 

“Nothing like a little judicious levity.”– Robert Louis Stevenson

 

A few weeks back, when word hit Wall Street that the Cyprus government planned to impose an across-the-board tax on the depositors of its two biggest banks, the major indices fell sharply and quickly.

The subsequent uproar at the prospect of a member of the European Union (EU) undertaking such an overt money-grab of bank deposits, particularly at the behest of the troika — the International Monetary Fund (IMF), the European Commission (EC) and the European Central Bank (ECB) — was apparently loud enough to put the kibosh on the action.

It was the troika, after all, who were insisting that Cyprus must go well beyond mere austerity promises, such as those agreed to by its near neighbor, Greece, if it wanted to receive the $13 billion bailout that it needed to avoid its banking system from imploding.

It was the troika, as well, that must have realized it had pushed things a bit beyond the pale when it insisted that nothing short of a levy on the deposits of Cyprus’s two largest banks, both in deep trouble largely due to overexposure to Greek debt, would suffice.

So a new solution was reached, with most of the hit being taken by the banks’ largest depositors, apparently quite a number of whom were linked to Russian business interests of curious repute. The smaller fish, the ones with deposits of less than 100,000 in euros, remained covered by deposit guarantees backed by the EU.

In other words, Cyprus citizens were told that, yes, the assurances they were given at the time that they actually made their deposits were going to be honored. True, other issues remain, such as limits on the amount of funds that individuals can take from the country — a potentially disturbing trend, as such limits on capital movement have been avoided by member-nations of the EU to date. Still, the citizenry of the country must feel a relative degree of relief, at least for the moment.

So what exactly is the problem? No run on banks; no immediate signs of “contagion” in the Eurozone; nothing to see here, so please move along.

Surely, the fact that the market rebounded as fast as it did can be taken as an indication that the current bull rally is one tough animal to slow.

Yet investors would be wise to consider some of the implications of the whole Cyprus “event,” as it is rich with potential to cause problems in the not-too-distant future.

One problem with Cyprus, for instance, is that economically speaking, it has pretty much been a one-trick pony for years, that trick being a tax haven to foreign investors. Not surprisingly, then, the banking industry represents over 40% of the island’s economy. There is no question that foreign money will now balk at putting deposits into Cyprus banks.

So where does that leave the island-nation?

Nowhere but on severely shaky ground. Any transition to a different economic engine will take a long time, something that the country seems to lack, based on its current trajectory towards bankruptcy. It would be hard to imagine that the country could be self-sustaining anytime in the near future.

No, Cyprus needs more funds to survive. Maybe it could ask the troika.

And why would the troika extend an even larger bailout that would be required to subsidize Cyprus as it seeks to morph into some new economic animal? What possible deal could be made? What does Cyprus have to offer?

In other words, how can Cyprus stay in the EU?

It probably can’t. Scenarios to remain are both weak and scant.

And even though Cyprus, the third smallest country in the Eurozone in terms of GDP, shouldn’t, in theory, make much of a ripple in the region should it choose to depart, it would end up making a far greater wave than it proportionally should.

That’s because investors will once again eye the Eurozone with concern and skepticism, and the multiple problems of the region will rear up its formidable head. Increasing recessionary tendencies? Check. North-South trade imbalances? Check. Fundamental differences of opinion on the mandate of the ECB? Check. Danger of contagion should any of the PIIGS be the next to exit the single-currency zone? Check, check and check.

Bottom line: The domestic economy may be strengthening, but signs of a key trading partner mucking about in an extended recession will have to give even the most bullish equity traders pause.

What the Periscope Sees

The Sabrient SectorCast ETF Rankings rate each of the ten U.S. industrial sector iShares (ETFs) by Sabrient’s proprietary Outlook Score and are revised on a weekly basis. The Technology Sector continues its impressive run atop the SectorCast leaderboard.

Here is the current list of some of the top performing Technology Sector ETFs year-to-date, as of the final week of March:

SOXX — iShares PHLX SOX Semiconductor Sector Index Fund, +13.78%

PSCT — Power Shares S&P 500 SmallCap Information Tech Portfolio, +10.88%

FDN — First Trust Dow Jones Internet Index Fund, +10.70%

FXL — First Trust Technology AlphaDEX Fund, +10.47%

IGV — iShares S&P GSTI Software Index Fund, +10.12%

SMH — Market Vectors Semiconductor ETF, +9.90%

QTEC — First Trust NASDAQ-100 Technology Sector Index Fund, +9.25%

ETF Periscope

Full disclosure:  The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by either Daniel Sckolnik or Sabrient. Neither Daniel Sckolnik nor Sabrient makes any representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.