You’ve Got 13 Days to Trade Greece Profitably

Keith Fitz-Gerald Feb 18, 2015
34 

I’m getting dozens of questions about Greece right now and what it means for your money.

That’s fantastic for two reasons.

First, it means you’re totally on point and thinking clearly in the pursuit of profits.

Second, it’s a sign that you’re already fully engaged in the Total Wealth strategy and one of our core Total Wealth principles – namely that there’s always opportunity in chaos, if you have the right tactics.

Greece is the single most important thing happening in the markets right now. I know that the mainstream press is treating it as an afterthought and the temptation is to regard it as “over there.” But the financial markets have proven again and again that events taking place thousands of miles from our own shores clearly influence market behavior closer to home.

I’m going to lay out three scenarios for what is about to happen and how it will affect you. Then I’m going to show you three trades you can make today.

Don’t wait to make your move.

Greece has only about 13 days to go before it runs out of cash, according to JPMorgan.

Here’s everything you need to know now…

What’s everyone in Europe so angry about?

Simply put, Greece lied to get into the EU, managed its finances terribly while ostensibly a part of the bigger picture, and now wants to renege on its obligations… or at least renegotiate them.

Greece owes some €320 billion, approximately 75% of which is due to lenders including the IMF, ECB, EFSF, and Eurozone governments, all of whom are doing business with the world’s big banks and trading houses. And again, they’re now refusing to pay it back. Swept in on a populist vote, Greece’s new PM, Alexis Tsipras is rejecting austerity equating it to economic “blackmail.”

I get where he’s coming from but to think there wouldn’t be conditions on the bailout that has saved his country to date is just plain naïve. But that’s a subject for another time, and possibly a debate or two.

The real problem is that each euro that’s been borrowed has been hypothecated – pledged as collateral for debt – at least once, but perhaps re-hypothecated as many as nine times, because of the way the world’s fractional deposit banking system works and the largesse associated with government printing.

In plain English, this means two things:

  • There may be only one euro in the system for every nine created out of thin air.
  • The banks have entered into agreements that reuse collateral pledged by clients for its own trading or borrowing.

Bear with me. I know this is hard to wrap your head around especially when it’s ostensibly a government/banking problem but this is what most people are missing.

There’s a huge cost to this Greek debt for each person in the most exposed countries, in the event Europe has to do a total bailout. If you live in Denmark or Germany, for example, you owe €708 and €700 respectively to cover Greece’s mess. Finland… €687. And so on.

It’s no wonder the chorus of voices calling for Greece to exit is growing, a position I’ve maintained since 2007. So it’s great to have company…finally.

What would a Greek exit really mean for global markets?

The global trading community isn’t sure what to make of all this. So you’re seeing more volatility than usual in all three of the broader market indices – the S&P 500, the Dow Jones, and the Nasdaq. World markets are not any different, for the most part.

That’s understandable given the headlines and the dawning realization that Greece has only about 13 days to go before it runs out of cash, according to JPMorgan.

In one corner you’ve got people like Gary Burtless, a senior fellow at the Brookings Institution who believes a Greek exit (“Grexit”) is a potential catastrophe. In the other you’ve got folks like Allianz’s Chief Economic Advisor, Mohamed El-Erian, saying it’s not a big deal.

I think the truth is somewhere in between.

Don’t forget that the euro is like the “Hotel California” of global currencies in that you can “check in anytime, but you can never leave” to paraphrase the old Eagles song by the same name. Nobody envisioned that a country would ever depart when the euro was put together. So there were never provisions made for a situation like this.

That’s both good and bad news.

The good news is that we’re in uncharted territory, so the world’s central banks can be creative. I know that’s scary, especially since I think they’ve been “creative” enough already. The money-meddling is ultimately going to end badly… just probably not tomorrow.

The bad news is that if Greece reneges and is either thrown out or walks out, the remaining clique is going to have to do some fancy footwork to convince other countries to stay with the euro. Think Spain, Portugal, Italy, and Ireland here.

The question then becomes what makes staying “worth it” for the remaining members, and I don’t think the ECB is prepared to answer that. I say that because S&P downgraded Greece’s credit rating while at nearly the same time, the ECB prohibited banks from using Greek debt as collateral.

My take since the beginning of the financial crisis is that Greece should be booted out on its drachma. The only question is whether that’s a controlled exit or more akin to a default.

So what happens next?

I see three possible scenarios.

  • Greece does depart the euro. If that happens, the euro drops like a rock and may even be worth less than $1 USD in the next 60 days. The U.S. markets tank by 10% and global markets follow. Then, traders get back down to business and the world moves on as central banks ride to the rescue with some form of QE even though they won’t call it that. Dips are a buying opportunity with a 12-24 month horizon.
  • The ECB forces new regulations on Greek banks above and beyond the conditions they’ve imposed now. This produces some minor volatility in U.S. markets, and global markets stabilize accordingly. The euro drops but stops short of breaking the buck. Here, too, the dip is a buying opportunity.
  • There’s an agreement at the last minute (after incessant posturing, hand wringing, and lots of earnest-looking political sound bites from the world’s leaders imploring “action” in the name of good global citizenship). This produces a rally and a strong one at that. The derivatives traders lever up even further, having “averted” a crisis. Or at least that will be the official story.

Scenario #1 would be best for the markets. Not immediately, mind you, but for the long term. That’s because it would force a realignment of risk with reality rather than this fantasy land “all gain no pain” bailout money-meddling madness we’re living with now.

Believe it or not, history shows that a rally usually follows the cleaning crew. Not many people are expecting that.

That was the case in each of the four most recent “global” financial crises: in 1994 when the Mexican peso devalued, in 1997 when the Thai government debt crisis roiled markets, in 1998 when the Russian ruble devalued, and in 2001 when the Argentinian government had its currency crisis.

Source: Hulbert Financial Digest

Okay, but what WILL happen next?

This time around I believe we’re going to see a blend of scenario #2 and #3. That’s because Greece will blink and politicians the world over will allow Greece to remortgage its financial obligations against a future that somehow never arrives.

Ultimately, though, we’re going to be back at the table again.

My guess is no more than 24 months from now when the populist vote that has brought all this to a head realizes that you really do have to pay your bills whether you like austerity or not.

How do I trade all of this… and when?

The first move is to bet against the euro by buying the ProShares Short Euro (NYSEArca:EUFX).

Critics charge that the trade is getting crowded, but I don’t think so. In fact, I believe the trade still has a way to go, especially if there’s a Grexit.

The second move is to buy short-term U.S. Treasuries or other extremely low-risk short term bonds. If there’s an exit, the world’s traders will bid these things up faster than hot air at a political convention.

Or, if safety with a little spice is more your speed, consider one of my favorite “no drama” choices, the Near-Term Tax-Free Fund (NEARX) from U.S. Global Investors. The fund ranks highly in safety because it invests in state and local municipal bonds issued all throughout America. Exactly the kind of stuff traders will run to if Greece debt gets carried out feet first.

And, third, you’ll want to sharpen your pencil and get ready to buy, with particular focus on big, fortress-like companies that are “must haves” and latched in firmly to one or more of the Unstoppable Trends we’re following – like Raytheon Co. (NYSE:RTN) and even Apple Inc. (NasdaqGS:AAPL).

You’ll know it’s time to back up the truck and buy when one of three things happens: 1) you see a magazine cover proclaiming the end of the financial universe as we know it, 2) you hear a politician gripe about how “nobody saw this coming,” or 3) your neighbor swears off stocks for as long as he or she lives.

Right on cue.

Best regards for great investing,

Keith

34 Responses to You’ve Got 13 Days to Trade Greece Profitably

  1. Mitch B says:

    Hi Keith, you say “don’t delay” and recommend “even Apple”. Since AAPL has shot up recently, would it be best to buy at market now, or wait until the drama unfolds and pick up AAPL on the dip, if it does dip?
    Thanks,
    Mitch

    • Keith says:

      Hi Mitch.

      That’s a great question – thanks for asking!

      The answer depends on your perspective and your risk tolerance. I believe it will be very hard to go wrong with any of these companies over the longer term because they are all tapped into the globally unstoppable trends we prioritize. But, to squeeze every last penny of profit potential out of any investment there’s no doubt you want to buy as cheaply as possible.

      Consider dollar cost averaging in over time to accomplish both and still set yourself up for a terrific run.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  2. Joe Boylan says:

    The big ‘next’ question for the PIGIS is: who comes next?

    Keep us informed Keith.

    • Keith says:

      Hello Joe.

      Right now that’s hard to say. But we’ll know in the next few days by which country’s debt costs skyrocket. Traders are clearly going to divide Europe into two camps – the haves and the have nots. Essentially, it will be Germany…and everybody else.

      Stay tuned!

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  3. Jonathan says:

    Okay, I like where you are going with this. How would you play “Calls and/or Puts” in this situation. I think Greece is out, although I have nothing to base this on.

    • Keith says:

      That’s a super question Jonathan and thanks for the kind words.

      There are literally thousands of ways to do this based on your risk tolerances, experience and trading capital. If you can elaborate on which instruments you’d like to trade, I can give a more precise answer. To me the most obvious place to start is puts on the Euro and calls on U.S. Treasuries. But, again, there are literally thousands of permutations here.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  4. Ginger French says:

    Keith,
    Love the info you put out and the manner in which you phrase it. The line from Hotel California and the three things to back up the truck for are great bulletin board material. I am long NEARX and have some of your listed equity faves to hold the portfolio from blowing away in the vortex.
    Ginger

  5. Tom Stanley says:

    Thank you…I’m on it

  6. Tom Stanley says:

    I was thinking about buying options on EUO

    • Keith says:

      Roger that Tom.

      Keep on your toes and watch your risk management carefully. EUO can move quickly in both directions. Maybe check out the article I posted recently on Position Sizing if you have not already.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  7. H. Craig Bradley says:

    GREECE’S CONDITION (RX): ON BORROWED TIME

    THIS DEBT/DEFAULT SITUATION WITH GREECE AND ESPECIALLY THE 12-24 MONTH TIME FRAMES ASSOCIATED WITH EITHER PROJECTED SCENARIOS ( #1, OR #2 + #3) REMIND BE OF THE CHOICE MY LATE FATHER FACED IN OCT. 2010 AFTER HE HAD A HEART ATTACK (WHILE IN THE HOSPITAL FOR SOMETHING ELSE).

    THE CARDIOLOGIST RECOMMENDED THESE TWO POSSIBLE TREATMENT OPTIONS: SURGICALLY INSERT A STENT IN THE CLOGGED CORONARY ARTERY, BUT DIE WITHIN 18 MONTHS LATER AS THE AORITIC VALVE (CALCIFIED) CLOSED SHUT PERMANENTLY. OR, HAVE A TRIPLE BYPASS OPERATION AND NEW AORTIC VALVE ( PIGS VALVE).

    THE ADDITIONAL LIFESPAN WAS EXPECTED TO BE LONGER ( undetermined) USING THE SURGICAL OPTION WITH TRIPLE BYPASS. ( INDEED, IT RESULTED IN 3 MORE YEARS OF LIFE, BUT AT GREAT EXPENSE TO MEDICARE. ).

    GREECE HAS SIMILAR FINANCIAL OPTIONS. EXIT THE EURO AND DEFAULT ON ITS DEBT OR RESTRUCTURE ( FINANCIAL SURGERY) AND LIVE A FEW MORE YEARS, THEN EXIT THE EURO OR DIE ( COLLAPSE). EITHER WAY, GREECE IS PROBABLY ON BORROWED TIME NO MATTER WHAT. CREDITORS HOLDING GREEK PAPER OR RELATED DERIVATIVES ARE LIKELY TO SUFFER SOME FUTURE LOSSES NO MATTER WHAT.

    SO, TODAY’S DRAMA IS ONLY ONE MORE DELAY OF THE INEVITABLE RESULT OF BAD DEBTS AND BAD LOANS. THEY MUST EVENTUALLY BE LIQUIDATED. DITTO WITH OTHER SOVEREIGN DEBTORS GLOBALLY. THUS, RISK OF DEPRESSION EXPANDING GLOBALLY. 1930’S ALL OVER AGAIN ??

    • Keith says:

      Well said Craig and well put. I share your thinking and, yes, definitely a repeat of the currency wars we saw early last century. Let’s hope the 1930’s don’t come with them, too.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  8. Emmanuel Eyssautier says:

    Thanks Keith, but why not buy EUO in stead of EUFX ?? Wouldn’t it be better??
    Best regards

    • Keith says:

      Excellent question Emmanuel. Thanks for asking.

      Honestly, I could make the case for either choice. It comes down to your personal risk tolerance and expectations. I think we’re in for a quick move which means a leveraged fund offers potentially a higher return albeit at additional risk.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  9. Eric says:

    What effect do you think you 3 senerios will have on T bills, bonds and mortgage interest rates?

    • Keith says:

      Super question Eric.

      My take is that 1 and 2 produce increased demand and rising prices for all U.S. Treasuries as part of a flight to safety that boosts U.S. government paper. Traders refer to this as “risk off.” Number 3 sees a modest sell off and yields rise accordingly as traders go “risk on” meaning away from bonds.

      Despite what our politicians think, the preservation of capital remains a far more attractive bet than the return on capital.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  10. SydChase says:

    Unfortunately your scenario 3 will most probably be selected so we will muddle on
    for two more years.

    • Keith says:

      Hard to believe isn’t it?

      Free markets are in large part unfortunately dead and buried thanks to Central Bankers.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  11. dick says:

    If they come to an agreement, would you go long or short the euro vs. the dollar?

    • Keith says:

      Great question and thanks for asking!

      If there’s an agreement, I’m inclined to be long the Euro because of the “relief” rally I think it will enjoy as a result. Ultimately, though, the Euro remains doomed so it’s a nimble trade for sure and not want you want to bank on longer term.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  12. pat says:

    What will be the reaction on gold prices?

    • Keith says:

      That’s literally a trillion $ question Pat. And, a good one.

      Contrary to what most people expect, I actually believe gold will experience a short term fall under all three scenarios. That’s because hedge funds and other large institutions will rush to sell the most liquid assets to unwind the margin they’re using now if the markets go against them. Some will do this for capital preservation but most will do this to reallocate risk.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  13. Pete says:

    what do you call” agreements at the last minute” 2

  14. Danny says:

    Dear Keith

    What´s one to do so much doom and gloom.
    I live in Spain and have money invested in euro shares , banco santander up 39% from when I brought them, gas natural up 51% from when I brought them,daimler up 85% from when I brought them.
    Is it better to just get out now or wait to see what happens?????????
    Thanks
    Danny

  15. RJ says:

    If we short the Euro with EUFX, should we also go long on the Dollar with something like PowerShares DB US Dollar Bullish ETF (UUP)?

  16. Ron Zok says:

    What do you think about the possibility of a North and South Euro system (divided by the Alps)?
    And, what would be the potential play if it is taken seriously?

  17. Win says:

    What are examples of “short-term U.S. Treasuries or other extremely low-risk short term bonds” (with symbols, please) to buy? Thanks!

  18. Werner says:

    Hi Keith,
    Whatever Europeans are going to try to avoid Grexit, its kicking the can down the road. Greece will fail (for 6th time if my memory is cocrrect), the question is just in how many days. If the Euro were to drop to par against the Dollar, I think it would probably be a good buy, because the US treasury will not tolerate that low an Euro. US always and onlly intervenes in currency markets as and when the Dollar gets too strong. Remember Plaza Agreement in 1985 and early 2000s when Euro fell to 0.82 to the Dollar – same story same effect.
    The race to the bottom of fiat currencies is still raging, just who will be the Champion. However the risk remains high for a complete meltdown of the Euro, it has been created against “nature”.
    Would consider buying a call on Euro if it fell to par? Just asking.

  19. Annibale says:

    How will this Greek problem effect the price of crude oil?

  20. Ken says:

    It seems to me that a “Grexit” would cause the euro to rise, since they would be getting rid of a parasite.

  21. William Mengers says:

    Hi Keith, Help! I have been looking and looking, but can’t find where I read your answer to one subscriber’s questions about different market scenarios, one of which was: what if you were 110% sure the market was going to crash, where would be the best place to put your money. You mentioned different 3X vehicles. Can you please tell me where I can find your column on that? This was only three or four days ago. Thank you, Bill

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