How to Play the Eurozone Crisis
This could be a good thing for savvy individual investors– at least temporarily.The markets have become addicted to bad news. We cheer when central bankers step in with quantitative easing, conveniently forgetting things are so terrible we “need” it in the first place. We’d rather take one more “hit” than step away from the narcotics of cheap money.That’s why I expect a rally when the ECB is forced to step in no later than Q3 2012. Here’s what to do ahead of time:
- Buy volatility when it’s low. My favorite choices are either call options on the VIX or the iPath S&P 500 VIX Short Term Futures ETN (NYSE:VXX), an exchange-traded note that effectively tracks the VIX. This will help you capture the initial downturn while also taking the sting out of your broader portfolio. At 18.85 the VIX is not as low as I’d like to see it, but not a bad entry point, either. If the VIX drops to 12-15, that’s the time to be very interested in this trade.
- Sharpen your pencils and pick up shares of large “glocal” companies when they get put on sale in the months ahead. Many will actually use the downdraft to solidify their competitive positions and be stronger on the other side.
- Gold and silver are going to get whacked. This is not a problem for those with a longer term perspective – both metals are likely to be sharply higher in the years ahead. However, in the shorter term, gold is likely to trade down sharply as banks raise cash. I’ll be looking to $1,500 or so as line in the sand. Silver’s retracement will be more nuanced because it is a function of the perceived drop in industrial usage that will accompany an EU disintegration. In that sense it won’t be as deep or probably as steep. I see $20-22 as a very attractive price.
- Short the euro. Go long German Bund futures and bonds. According to Bloomberg, the June 10-year bund futures contract is 140.43, or slightly below the record 140.51 it hit recently.
- Buy U.S. dollars. Longer term, they still stink but the world will run to them once again when the stuff hits the fan.
At the end of the day, thinking about all this is no fun. I know – I get paid to do it every day. When the fundamental environment is such a wreck, it can wear on you. It certainly does on me.But you know what?That’s not actually so bad, because big down days are actually profits in the making; it’s how you deal with them that makes the difference.