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Eurozone crisis – why you should avoid listening to the mainstream press

The best use of newspapers?

A few months ago, when I was starting up this blog and my trading, I would begin my day by reading the finance section in the Telegraph and the Financial Times on my smartphone. At the same time, I discovered blogs like The Slog and Zerohedge.

As time passed, though, it became ever clearer that most journalists in the mainstream financial press were trapped in a 24/7 news cycle, and never analysing the real underlying issues. One moment they would praise Merkozy for solving the problems of the Eurozone – markets would rise and the world was saved. The next, the Eurozone was falling apart and it seemed as though nothing could be done to save the peripheral eurozone states.

However, if you were reading the aforementioned blogs, and/or had an independent and an analytical mind – you would have realised that the crisis was always there all along, and all the politicians were doing was kicking the can down the road. The eurozone crisis was/is not going to go away without either a collapse of the Euro or a large scale default by some Eurozone countries.

Now tonight I was reading the column by Philip Aldrick in The Telegraph – which almost made me spit out my tea.

Greece is at the epicentre of a new euro crisis – and its chaos will spread

If Greece refused the money, or if the IMF refused to lend, the consequences would be dire. With the economy plunged into immediate crisis by the currency’s collapse, an even more severe austerity would be thrust upon the people. There simply would not be the money to public sector pay wages, for example. With tensions seething, the neo-Nazis might even gain further ground.

Oh dear, oh dear, oh dear.

Firstly, the crisis was there all along, so it is not a “new euro crisis”. It did not miraculously reappear overnight after being solved. The Greek election was planned for the weekend, and a collapse in the pro-bailout parties’ support was always on the cards. If you don’t believe me, you were not reading The Slog.

Secondly, if Greece left the Eurozone and the new drachma collapsed, then the Greek economy would not nosedive, rather, it would stride onwards. Tourists would flock to Greece to take advantage of cheap (drachma) holidays, and a devaluation would make Greece’s general price level much lower to foreigners. Growth would return, and unemployment would tumble from an export-led recovery.

Thirdly, there seems to be a real issue with political correctness regarding the neo-nazi Golden Dawn party. Of course, they may be a bit nutty – but Greeks were putting two fingers up at the old political establishment, Brussels’ draconian bailout terms and savage austerity. Keeping Golden Dawn out of power should not be a priority – they are merely a symptom of rebellion against the EU. If you repress the Greek people through humiliating bailout terms, then they will vote for anyone who will stand up against them.

However – most of that is tangential to my point, which is you should not use the newspapers as your primary source for information these days. Read The Slog, Zerohedge, & Seeking Alpha (for several opinions) too, and you will be surprised at what you find and how accurate many of their predictions are.

But this also has ramifications for traders and journalists.

Traders who are armed with the truth, despite what is being said in the mainstream press, will surely profit from the information disparity between themselves and the other market traders who digest the FT, and the newswires.

As for journalists, if they were prepared to go out on a limb more, do more investigative research, or even just copy stories from the blogosphere – like the recent pillaging of Greek university and hospital funds – then they would have some incredible scoops which would propel their careers.

In the meantime though, I rather like this information gap – because I can see what the news agenda will be before many people are aware of it. But then again, maybe the Eurozone crisis will be resolved (once more) by the end of the week?

 
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Posted by on May 8, 2012 in Trading Ideas

 

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INTERVIEW: How monkeys are better than fund managers – Pete Comley on his new book

Pete Comley was on his allotment last year listening to David Kuo’s podcast for the Motley Fool. The host was discussing a share trading competition for schools, and how 61 of the 72 teams had failed to beat the index.

David: “Do you know what? In the wider industry, in the professional fund management industry, these statistics are almost identical to what happens. Out of all the funds that are available for people to buy, approximately 15% of professional fund managers will beat the market, and 85% of them will not.”

As I forked over my vegetable plot, those words went round in my head. I then stopped and listened to it again. Had I heard it right – that virtually all professional fund managers, that were paid millions in bonuses – couldn’t beat the market. Surely it wasn’t true?

Over the next few months, Pete researched the industry and wrote a book about it. Indeed it was true. A monkey with a pin who picked and held stocks at random beat the majority of investment ‘experts’. Furthermore he argues that most people would be better of they just kept their money in the bank, rather than investing in funds.

Here follows an interview with Pete – you can download his book, Monkey With a Pin, FOR FREE at his website monkeywithapin.com

Meet your new financial advisor

Some people will read the book and think, isn’t this a bit grim? Because if they’re in cash they are going to be ‘financially repressed’ by inflation and if they are in shares many will pay large fees. Is there an optimistic view of what you’ve discovered?

Yes, I think there are two optimistic views on it. The first is that once you understand what all your potential pitfalls are in a trading system, you can then effectively game the system. You know where not to lose your money so you can actually be a much better trader. For example if you had just bought passive ETFs [Electronic Traded Funds which follow the stock market], and you buy and hold them, and you were confident enough that the ETF will still be around in ten years, and you picked a low-fee platform – you could keep your costs down to maybe 0.5% a year. But you have to be actively thinking about the markets and have a strategy.

The other reason to be positive, which is something I hadn’t really appreciated until I did the research, was all this stuff about cycles in the market – which I had never really sort of twigged before. Should have done, but haven’t. But I think it is quite likely that there will be some point in the next two years when the market declines to something worth buying, like the FTSE down to 4,000.

If the FTSE goes near or below 4,000 I’m just going to convert all my cash into shares somewhere, because that – if you look into history there are usually 2 or 3 significant lows in a corrective, secular bear market – and if it were to do that one [4,000], it would be the last low before we start a huge bull run over the next decade or so. I want to be fully invested at that point.

It seems as though individual investors are having to spend more time doing research into the shares to achieve better returns. Do you think there is a new gap in the market for fund managers, and people who do the research and do the legwork?

The simple answer is I don’t think there is a gap in the market. If you read the stories about a company and do the research, you will probably make the wrong decision. You remember in the book I talked about the ‘turtle traders’, the guys taught to be a bit like Eddie Murphy in ‘Trading Places’ where they took 14 people off the street and taught them to trade – and they made, whatever it was, half a billion pounds in a couple of years.

One of the key things they were taught was to effectively never read a paper. Never read a news story. Everything you need to know is in the price already, in the graph, and you just need to trade the breakouts. You just look at it and you trade the breakouts, and don’t read.

I pick up my Investors Chronicle or Shares magazine – in fact I won’t even read Shares magazine again – there’s no point, because all it will tell me is something which it is too late to invest in.

So is there a role for those fund managers [who just buy the news stories]? No, of course there isn’t. I think they will just disappear really – when eventually people realise that.

There are some people out there who are some quite clever traders – and if you want to spend a lot of time, I think you can do something and get some positive returns. But for the average Joe Bloggs in the street, it’s a waste of time. So they should go for a simple thing like passive index trackers if they want to dabble in the stock market.

But if you’re going to dabble, you still have to think about whether you should get in here or there?

I think the answer is, like Buffett, you should buy when the stock market is cheap.  I think my strategy in the future will be one of being a bit like a panther. Just sitting there in the long grass, sleeping, and when some kind of injured animal comes along, I’ll jump out and kill it and I’ll eat it and then I won’t bother to eat for a week or two. Wait for the injured prey to come by.

I agree though, timing is the difficulty – that is where you need a set of rules. For me, I see that FTSE below 4,000 and I don’t know at what point it is going to stop, but if I can get in anywhere below 4,000, I am going to be a happy bunny, long term. In the short term, I might be thinking, I could have got it cheaper, but I’ll still be happy long term, because the potential to go lower isn’t very likely. I might get my darts out as well, and pick ten shares at random – because I know how well that strategy works [i.e. the monkey with the pin]. Some of them will be dogs, but some of them will be stars. I will buy the monkey another banana.

——

At this point, I talked to Pete about the effect of benchmarking on fund managers portfolios – how benchmarking encourages fund managers to strive towards mediocrity, and to not take risks. The implicit mentality is: “if we fail, we will fail together”. The net effect is that everyone holds similar portfolios and the performance is very closely aligned. No one stands out for brilliance, nor does anyone stand out for shoddiness. For the second version of his book, Pete plans to add another section on this.

——

You said managers can’t really perform consistently, so should they exist?

Well, I think that whole industry will get disintermediated. I’ve seen it in my industry, I’m a market researcher, in fact I partly helped disintermediate it. I was one of the first people doing online surveys in this country. The industry tried to take me to Professional Standards, for bringing the industry into disrepute by running an online survey. They really were fearing what it would do to their business. They didn’t in the end. Since then the industry has radically changed and the same is going to happen in the fund management industry. People have realised we don’t need most of them.

What I am expecting is that the number of fund managers will shrink substantially, I think we both agree on this, but presumably there will still be a place for good fund managers.

I think there are genuinely people out there who are better than the average and it would be great to know who they are. They are never going to be perfect all the time, but even if they can only do it better than chance, they are worth following. At the moment though there probably aren’t the incentives in the system for them to be able to follow their own real style because of the reasons you were saying. They are being benchmarked all the time. They might have a personal style like mine where they hold cash for a while, and invest at the right time. If you had that kind of style as a fund manager you couldn’t survive the system. But it probably is a more successful strategy.

You make an important point about incentives and I think that it what this industry boils down to. Because if you are an average fund manager, you just need to have an average portfolio, make it similar to your peers – then you get paid your management fee. Is the solution to this to say – you may not charge an annual fee and you can only charge based on your performance?

I agree – the incentives aren’t right. I think there is a lot of logic to that because at the moment the system doesn’t work. If they fail, the punter pays, and if the thing succeeds, the punter pays and is also charged an extra performance fee. It’s not very equal is it? They should only receive a payment if they beat the average – that would wipe out most of them.

The other point is to avoid drawdowns. For example, if a fund manager loses 50% of your portfolio like many did in 2007/8, then you need to have 100% return just to get even again. There needs to be an incentive there to limit the downside risk of these portfolios. Say, if the managers lost you money they would have to make it good themselves.

That would be nice. But wasn’t that the concept of with-profits policies? The life insurers used to sell them a decade or two ago, they said they would smooth out the returns so that if the markets turned down they would chip in some reserves. They weren’t as generous as thought because they were just pocketing most of the profits during good years – so they had big reserves to chip into during the bad years. There’s something unequal about it.

That rounded off our interview and I’d just like to thank Pete for his time and for writing his brilliant FREE book, Monkey with a Pin

 
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Posted by on May 6, 2012 in Trading Ideas

 

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UK shale gas industry set to boom – how to profit from it

The UK's energy future?

As I wrote a couple of weeks ago, the US is benefiting from a booming shale gas industry. So much has been invested in the drilling of shale that the US now faces a glut of natural gas and depressed prices. But if we were to look at the other side of the Atlantic, the UK has barely touched its shale resources. There are two main visible players in Britain, and those are Cuadrilla Resources and IGas – but IGas is the only one publicly traded.

Recently IGas upped its estimates of recoverable shale gas at their Ince Marshes site to 10TCF (Trillion Cubic Feet). To put that in perspective, the UK uses 3.3TCF every year (Source: NoHotAir). That means that IGas owns fields which have the potential to power the UK’s gas needs for 3 years. No North Sea resources, no tankers coming from dodgy Middle-East states, no pipelines from Norway… for 3 years!

My question then was: why is this company only trading at roughly £100M?

My first thoughts were the controversy surrounding shale drilling and the misunderstandings about it. Will nimbyism and local politics get in the way? Concerns were raised about earthquakes caused by fracking operations near Blackpool and the government had suspended Cuadrilla’s drilling, pending an investigation. That DECC investigation last week concluded that Cuadrilla should continue, so this bodes well for IGas’ holdings.

Secondly I wondered if that because it is a small company and barely discussed in the newspapers… it has garnered little attention. Its low market capitalisation could be due to this.

Thirdly, I wondered whether the fact that they are not planning to develop their shale gas resources was weighing on its valuation. Instead of drilling themselves, IGas announced that they would be looking for partners to exploit the gas for them.

After attempting to contact the CEO this morning, I was sent towards their PR department who told me very little beyond what I already knew. Except that the woman who I spoke to implied that they would be looking to sell their shale gas acreage, as opposed to other options.

According to their recent investor report IGas own 384,249 acres. In the US, where commercial production has taken off, transactions in 2010/11 valued each acre at $7,468 (according to the same report). Now correct me on my back of the envelope maths, but that makes an estimate of their shale assets worth $2.9 billion or £1.76 billion at today’s exchange rates. Even if only a fraction of those assets are retrievable, exploitable and sellable – IGas’ share price should be a multiple of where it is today.

What also gave me faith in the company is the fact that its management own a significant portion of it. Francis Gugen, the chairman, owns 17.03% of the company, whilst Andrew Austin, the CEO, owns 6.57%. Those two will know more about the company than any freelance researcher like myself can find out – so that should be a strong signal to buy in.

Significant Shareholders (Source: IGas website) No of Shares Percent
NEXEN 39,714,290 24.48%
FRANCIS GUGEN (Chairman) 27,615,764 17.03%
LEVINE MANAGEMENT AND PETER LEVINE 14,429,135 8.90%
BRENT CHESHIRE 11,429,253 7.05%
ANDREW AUSTIN (CEO) 10,659,253 6.57%
BAILLIE GIFFORD 8,088,217 4.99%

The only risks I do see are political obstacles. Many people are uninformed about the risks and unaware of the potential which shale gas holds in the UK.

But the way I see it – the market is not expecting IGas to make much money from shale. Once they do make an announcement, however, regarding a shale drilling partner or selling off land parcels – we will see the company’s valuation reflect this.

All in all, the company owns shale gas fields which may be worth several times more its current market value. As the company appears to have had minimal attention paid to it, it is trading at low prices and furthermore the management have put several million pounds of their own money into the business. Although there are risks, the company does have a strong portfolio of CBM (Coal Bed Methane) and oil assets which limits the potential downside. This is a strong buy, if ever I saw one.

 
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Posted by on April 30, 2012 in Trading Ideas

 

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How democracy will triumph over the EU – and take down the Euro with it

"Madame Merkel, 'ave your fiskalpact et la France will 'ave zees baguettes!"

As I write, voters in France are casting their ballot papers in the first round of the presidential elections. Francois Hollande’s Partie Socialiste and Sarkozy’s right-wing UMP party are expected to proceed to the second round, where many predict that Hollande will win. What this means is that Sarkozy, who has been a bastion of saving the Euro with a big bazooka, or a firewall, (or perhaps his stool) – will be out of office. Instead, Hollande will be in power and he wants to renegotiate the Fiskalpact that Merkel and the EU have imposed on the Eurozone.

Hollande wants the agreement to have more focus on growth and jobs, as opposed to cutting budget deficits and national debt. This could raise hackles in Germany and Brussels, as George Magnus of UBS notes (quoted from Zerohedge)

If Hollande, as leader of the Eurozone’s second economy, were to try and stand up to the German government, he would not only feel he had a popular mandate to do so, but doubtless act as a lightning rod for a wave of sympathy and Euro-angst from other Eurozone countries, such as Italy, which are becoming increasingly worried about the character and consequences of the current German-dominated approach to the Eurosystem crisis.

This “German-dominated approach” which Magnus talks about, involves bailing out the “fiscally-irresponsible” countries and then impose swinging austerity on them – at whatever cost. But since this is not easy to do in a democratic country – the EU has implanted their ‘technocrats’ to enforce the fiskalpact.

In Athens riots are almost a daily occurrence, unemployment is over 50% among young people, and at 22% among the overall population, according to official (and probably untrustworthy) figures – I suspect it is much higher. The Bank of Greece scandalously embezzled funds from universities and hospitals to pay off the Eurocrats. In Italy, Burlesconi was ousted to make way for Monti and the EU elites are putting pressure on Spain. The EU is forcing these countries to destroy their economies with austerity – with non-elected rulers.

The contempt held towards its citizens by the EU has led to the rise of popularist, nationalist parties. If we look towards Greece, the main parties are struggling to hold power in the upcoming elections, whilst fringe parties are garnering votes. Rajoy in Spain is trying to insist that his country will not need a bailout because he does not want to suggest Greek-style austerity. Even in Germany, where Merkel is not up for re-election until next October, her political support is slipping because many Germans do not want to throw good money after bad to the European periphery.

The question is: how much longer can this continue? The EU was established to prevent another war in Europe, but its actions seem to do little but provoke one.

The Eurozone’s underlying problem is its currency. In the past if a country was struggling it would devalue its currency, exports would become cheaper, imports would become dearer and the domestic economy would naturally recover. However, the Euro puts a straight jacket on these economically challenged countries because  fixed currency rates prevent them from devaluation. If the likes of Italy and Greece want their economies to recover, then they will need free-floating exchange rates, not austerity.

National politicians will realise this in due course, once the pressure from their people becomes too great. Once one country sets a precedent about leaving the Euro, or attacking the EU, then others will quickly follow. Hollande may be the start of it – maybe he won’t be. Greek elections in the next fortnight may be the catalyst, where the likely result is an eclectic mix of parties opposing austerity, maybe they won’t be. But however you look at the Eurozone crisis, democracy has to triumph over the EU, and consequently rip the Euro to shreds.

To trade on this, I would get out of stocks (and short-sell them) right now, and buy German Bunds and gold. The equity markets have recently undergone a rally – totally ignoring the fact that the West is in a dire economic state – reality will reassert itself soon enough. Shorting the FTSE 100, I would put a stop loss at 6000, I think there is a good risk/reward ratio there, and I do not expect it to reach that state.

German Bunds are not a perfect hedge, as a Euro collapse would lead to the Germans accepting a large part of the ECB’s losses. However, if you are a Eurozone bank, the safest place to park your money is in German bonds as their budget is fairly balanced, and if the Euro broke up your bonds would become denominated in New Deutsche Marks – which would appreciate greatly against other currencies. So I would recommend buying these for their safe haven status.

As for gold, if the world does go into an Armageddon type scenario due to Europe, gold will be one of the few safe places for your money. It has been trading in a fairly cheap range by recent standards and I expect it to climb much further. I would put a stop at $1600 an ounce if I were trading today.

I currently hold all three positions, and got into them at an earlier stage. Since then, all three positions have been profitable.

 
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Posted by on April 22, 2012 in Trading Ideas

 

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America’s Natural Gas Glut – Opportunities ahead?

Source: US EIA

You may not be aware already but in the United States, over the past three years a huge glut of natural gas has emerged. Improvements in ‘fracking’ technology have allowed companies to exploit shale gas fields which were previously considered uneconomical – since then natural gas production has boomed. Every producer was expecting to get rich but that has lead to the US overproducing natural gas, and prices are at a 13 year low.

As The Oil Drum points out

U.S. shale plays share many characteristics with the gold rushes of the nineteenth and early twentieth centuries. Both phenomena result from extreme promotion. Anyone can join. Every participant believes that they will get rich. Great amounts of capital are destroyed as entrants try to get a position. The bonanza is exhausted sooner than most expected (Andreoli, 2011) and few profit in the end except for the vendors that serve participants.

They conclude

The gold rush mentality taken by companies to enter shale plays has added expensive leases and new pipelines to those costs, further complicating shale gas economics.

Looking forward, however, natural gas prices are not going stay at these low levels..

US Active Rigs - Source: US EIA

On the supply-side, due to the aforementioned gold-rush mentality, many natural gas producers paid very highly for their land leases. At the current price of roughly $2 per million British Thermal Units, energy companies are making a loss on their gas projects. Basic economics dictate that loss-making businesses close down, and this is what we are seeing.  The number of active rigs in the US has fallen from roughly 1,000 in 2010, to approximately 600 today.

Equally on the demand-side of the equation, structural changes are taking place. For instance, many power plants are switching from coal to gas (due to the low price of gas, and environmental legislation discouraging coal). Several new cars are being fitted with engines which run on CNG (Compressed Natural Gas), and petrol stations are adding CNG to their pumps. For these two infrastructural changes to take place however, they will take time to implement and it is difficult to predict the long-term impact of these changes.

Source: Valero Corp conference March '12

What I have discussed so far however only covers the US domestic issues. If we were to take our scope further afield, we would see that elsewhere in the world there are natural gas shortages. In Europe, gas is trading at 4x the US price and in Asia, as much as 6x. So surely this is a enormous arbitrage opportunity, US prices should rise and prices outside the US should fall. So why is that not happening already?

As I found out, the US has a substantial LNG (Liquified Natural Gas) import capacity, but very limited export capacity. So regardless of that huge price differential, no one can take advantage of it. Naturally, companies have clocked onto this and have been pushing to create LNG export terminals. Cheniere Energy earlier this week were granted the rights to create one. Nevertheless, gas cannot be expected to leave the US from the terminal until late 2015. As for other terminal projects, the US government will not give the go-ahead until a study into the price impact on consumers from exporting gas, has been completed later this year. Even then, it will still be at two or three years before the projects start operating.

To summarise, US natural gas prices are expected to stay low for at least a couple of years, but perhaps rise somewhat in the medium term. Until more demand comes on tap through gas-powered cars, gas power stations and arbitrage with the world, demand will stay fairly constant and in the meantime, supply is tailing off because producers are making losses.

In terms of trading, I would buy natural gas futures because this current price cannot be sustained with producers losing money. But I do not want to be picking a bottom in the market yet, and also risk losing money through contango, not to mention that my broker has a 43 tick spread on Natural Gas as well. I think there must be good opportunities with energy-related equities and I plan to investigate in the coming weeks.

 
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Posted by on April 18, 2012 in Trading Ideas

 

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Fleeing a sinking ship – Santander

Soon to be torched

The tale of Abbey National is the archetype of what happened to Britain’s building societies. It demutualised in 1989, resulting a windfall payout of shares to all its members – Abbey was one of the first, and then many other building societies followed suit. Both of my parents received some free shares before buying a few more.

The Abbey National later merged with Santander in 2004 and their shares were converted into those of Banco Santander. It weathered the storm of 2007/8 reasonably well, and its management has had the wisdom to strengthen its balance sheet over the more benign past 2 or 3 years. Their core capital ratio (a barometer of the health of a bank’s balance sheet) increased from 6.2% in 2007 to 9.2% in 2011. Equally the bank made over 40 billion euros in that period and also acquired several ailing banks like Alliance & Leicester and Bradford & Bingley.

Faced with the the unraveling of the Euro and economic problems, however, Santander is in serious danger. According to their Q3 2011 report (the most recent I can find) 37% of their €734 billion loan portfolio is in Eurozone countries (26% Spain, 4% Portugal, 7% others) with another 29% in the UK (which would suffer badly from a Eurozone recession). Backstopping the bank is €78.3 billion of assets, but with loan writedowns on the cards, Santander is in trouble.

Relative to its European banking rivals, Santander is the best of a bad bunch. But with the upcoming shocks of recessions, falling house prices and losses from a Euro break-up – it is not something you would want to own.

So a couple of weeks ago I advised my parents to sell out. They both saw their shares as a long term investment, and over the years have received many small dividends. But after explaining the issues Santander faced to them, they agreed that they ought to get out. They hadn’t got around to it until Friday, when Dad got out at £4.16 a share at lunchtime and my Mum sold her’s in the afternoon for £4.10. At the close of play they were trading at £4.06.

The Titanic sank 100 years ago today, and I think that there is a rather ironic parallel between that liner and these shares. Santander’s shares will probably tick up tomorrow, with a typical “dead-cat-bounce”, but I would expect that we have got on the lifeboats, before everyone realises the severity of iceberg ahead.

 
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Posted by on April 15, 2012 in Trading Ideas

 

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Greece’s woes will tank the stock market over the coming days

Yes Angela, it is that bad

Tomorrow is the ultimatum for Greece’s private creditors, as they must decide whether to accept the “voluntary” haircut on their bondholdings. To cut a long story short, if they accept the deal they will receive unattractive, long-dated, low-interest bonds for roughly 30% of face value. Should creditors decline the deal however, Greece’s government is going to enforce Collective Action Clauses (CACs) which will force creditors to accept the terms.

So what, you say? Anyone with any sense would have dumped their bonds ages ago, and those who do hold them have largely written them off. The reason why this matters is how this “voluntary haircut” is seen by the ISDA (International Swaps and Derivative Association) with regard to CDS (Credit Default Swaps). If the CACs are activated by the Greek government, then the ISDA is expected to see it as a default – and deem that the insurers of CDS must pay out. On the other hand, if the haircut is accepted by creditors, then the CDS will not pay out.

So tomorrow is a crisis point, and the way things are looking the CACs will come into play. I am unsure of the threshold for the CACs to be enforced, but I think it is 66% of bondholders, and as of this afternoon, only 39.3% had agreed.

The problem is that nobody is certain that the ISDA will behave in this manner. In fact, if they do declare payouts, the insurers are likely to fight tooth and claw in a long legal battle to not do so. If the ISDA do not, then the parties who have insured their debts are likely to have an equally long and laborious legal battle on their hands.

The fact of the matter is, if losing 70% of your investment doesn’t count as a default, then what does? Many banks, hedge funds and investors have insured their investments with CDS and if they won’t be paid out on the Greek deal, then surely they won’t be paid if other Eurozone nations go belly up. If CDS fail to deliver, then the instruments will become redundant and fears of contagion will spread across peripheral Europe as investors will flee their positions. Bond yields will rise in the periphery, the value of those bonds will fall, resulting in major harm to Europe’s financial sector.

Wranglings about CDS, the risks of the Eurozone breakup and a potential meltdown, would make you think that the market would crash. But no, the FTSE 100 last week almost hit 6,000 and has only retreated slightly since that point. The markets seem to have totally underestimated the severity of this Eurozone crisis. If investors lose faith in Italy and Spain then we’re heading towards Armageddon scenario.

At 8:00 AM tomorrow morning sell all the shares you own. Short-sell the FTSE 100. I may of course be wrong, this process may be a slower than estimated – but it would seem that the market is a captain aware of the stormy waters ahead, but complacently sailing into them. A wreckage is not far away.

 
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Posted by on March 7, 2012 in Trading Ideas

 

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