STILL ONE OF MY FAVOURITE TRADES
This summer, did you happen to catch the story of the Reading man who was flattened by a bus? It was all caught on camera (click here to watch it). He got smacked, thrown for a loop, and then in true English fashion, dusted himself off, and headed to the pub for a pint. Well, often that’s how my trading feels these days.
But some positions don’t cause me quite as much stress, and I want to talk about one of those today.
Over the weekend, the Germans went to the polls, and Angela Merkel did not fare quite as well as the market had hoped. Although she still won, it’s not as clean as previous elections. Forming a coalition government will be more complicated, and most importantly, hopes for a move towards a more unified Europe now appear much more difficult.
This has had a predictable effect on the euro.
Suddenly, investors are once again worried about the rise of anti-Euro parties. Spain, Italy - all sorts of separation scenario situations are now on traders’ minds.
And yeah, I understand the concerns. I certainly wouldn’t want to be stuffed full of peripheral European debt. And I know the initial reaction might be to sell all European assets, yet I think that is the wrong response.
This might seem trite, but the scariest thing in today’s market is currency strength. No one wants it. No one can afford it. And at least on a short-term basis, it is probably the most difficult adjustment for the various global economies. Take the United States. Would raising the overnight Fed Funds rate by 50 basis points hurt the American economy? Probably not nearly as much as the accompanying rise in the US dollar. It’s the secondary affects that are the real concern. Countries’ ability to vary monetary policy has become neutered as FX has become the escape valve for differing policies.
Europe’s biggest problem over the past six months has been a strengthening Euro. As investors have recognized Europe’s relative economic strength, they have bought the currency, causing a rally, but most alarmingly, creating a self-defeating economic headwind that has dampened the reason for buying the Euro in the first place.
Going forward, Euro weakness is therefore more important than anything else. Seems absurd, but that’s the world we live in. So although many European stock market bulls might take pause at the recent developments in Germany, as long as it sends the Euro lower, that’s all that matters. You can moan and wail about it being stupid, but how much sense does buying the Yen on North Korean escalations make? None, but that’s what happens. You can fight it, but I would rather take advantage of it.
And I think some European angst that helps the Euro sell off will be welcome.
Now let’s just hope this isn’t a case of “be careful what you wish for, you might get it - good and hard.”
One of my favourite trades.
I haven’t spoken about it lately, but owning super-long-dated Eurostoxx calls is still one of my favourite positions. They definitely have a Hotel California air to them, but for a guy like me that trades too much, the illiquidity is sometimes a godsend. It forces me to hold them for the long haul.
I originally wrote about this trade a year ago, Pretty Sure I am alone in this Trade, and I don’t want to repeat the same argument, but I did want to take the time to highlight an interesting aspect of this trade.
Usually, most equity options are short dated enough that the rho (sensitivity to interest rates) is quite small. But much to my delight, the Europeans list options on the Eurostoxx Index (SX5E) as far out as December 2026! Yup - you read that right! 2026 - nine years from today....MUCH MORE
