Why the vote of a few million people in Greece is bad for stocks and could ruin your retirement fund.
Funny thing about those Greeks – after the close on Monday they remembered they were the birth place of democracy and decided their people should vote on the bailout package that has broken their economy, is going to break their banks and pension funds in the coming weeks and will put the economy into a five year recession.
Sounds appropriate – except, as in all countries, not just Greece – most politicians have no understanding of the impact on financial markets and the European, US and world economies of a rejection of the bailout and there is not one chance in a million the Greek people will be made to understand what will happen if the reject the bailout. (See my recent article on “Trading the Market Madness.”)
What would a no vote mean? It’s bad for stocks.
And what it would it mean for an investor in the good old US of A, wondering why the vote of a few million people in Greece could ruin their retirement, their kids’ college funds, plans for that foreclosed house or that used yacht on EBay?
There are two views on the matter, so far.
View Number One: This is a negotiating ploy – and a very crafty one I might add – by the Greek Prime Minister (his name is too long too type, I lived with Greek brothers in college, their name was too long to fit on the mailbox). The referendum on the bailout is scheduled for January. He wants better terms – less austerity so the Greeks can continue to employ an unspeakable number of public workers, more capital at very low cost for the Greek banks, all of them insolvent after the 50% haircut on Greek debt goes through, and a promise Greece will not be kicked out of the euro zone if they hit some very soft budget targets.
View Number Two: The Prime Minister is somewhat sincere, believes the people need to vote on their future and the vote will determine if his government falls and a new election is required to find a new set of politicians to negotiate with the powers that be in Europe for a different kind of bailout.
Both views have at their center a political calculus by the Greek Prime Minister that is both cunning and terribly flawed. It is cunning because alone among the Europeans he recognizes time is not an independent variable – the longer the uncertainty, the more the bond market loses faith in the debt of Greece, Portugal, Ireland, Spain, Italy and whoops, France. And he stands a chance of getting better terms as markets deteriorate and the crisis spreads.
It is terribly flawed because the Greek voters do not really matter, the only voters that matter are those paragons of fiscal virtue, the good Germans, those people who are happy excoriating others while their owns banks are the worst capitalized in the developed world but hey, some dumb banks had to loan money so people could buy our products and keep unemployment up.
Let’s put away the current events analysis and focus on you – what can investors do?
For now go with short term trades, two months or less, that are all about fear – gold and its cousins, the gold miners and silver and volatility, the VIX. And since there is no way to know tomorrow’s headline avoid buying stocks and sell puts, you don’t necessarily own anything if you are focused on the short term.
Sell puts on the GLD (GLD), the ETF for gold; sells puts on the GDX (GDX) the ETF for gold miners; sell; puts on the SLV (SLV), the ETF for silver; sell puts on the VXX (VXX), the ETF for the VIX, the market measure of volatility sometimes referred to as the “fear index.”
I also like the very obvious play on the dollar – it going up as the euro falls – the ETF for the dollar is the UUP (UUP), you can sell calls against it.
You take the cash and you can spend it, average down buying more shares or use it to hedge your entire portfolio against Greek democracy with some puts on the S&P, a black swan type trade, way, way out of the money puts, a “just in case” trade.
Things are going to get more volatile – and more interesting – before we can see clearly what is gong to happen in Athens, Berlin, Europe, here, world markets, wherever, whenever