Thursday, May 24, 2012

Greece Exits the Euro

Very nice summary of the impact. Just click on the different icons.

Now think for a moment.. Put yourself in the same situation.

If you are a Greek with money in the bank, when you hear talks about Greece exiting Euro, what would you do?

This is a death spiral..  Talks like this will just forced more people with the means to draw money from the bank and moved it somewhere else. The 1st stage of panic is already set... Mayhem cometh... sooner or later..

If you are one of the banks in Euro supporting the Greeks and other european nations' debt.. what do you think.. your shareholders and others might start dumping the shares in anticipation of the mayhem.. this is the 2nd stage..

If you are one of the other countries with similar debt problem as greece, what will your stakeholders think when they see 1st and 2nd stage happening... They will stop lending too..

Onlookers from around the world.. comes next.. they will start examining any linkages to the Europeans (good or bad) and may do the same.. Dump first..question later. Remember Lehman & Bear Sterns? Local banks were reported to have some linkage to them in 2008 and almost immediately, you can feel the fear in the market even though alot of companies are not directly related to the loans.

Monday, May 14, 2012

Battle Station!

Some of us have been talking it over, and here’s what we think the end game looks like:
1. Greek euro exit, very possibly next month.
2. Huge withdrawals from Spanish and Italian banks, as depositors try to move their money to Germany.
3a. Maybe, just possibly, de facto controls, with banks forbidden to transfer deposits out of country and limits on cash withdrawals.
3b. Alternatively, or maybe in tandem, huge draws on ECB credit to keep the banks from collapsing.
4a. Germany has a choice. Accept huge indirect public claims on Italy and Spain, plus a drastic revision of strategy — basically, to give Spain in particular any hope you need both guarantees on its debt to hold borrowing costs down and a higher eurozone inflation target to make relative price adjustment possible; or:
4b. End of the euro.

Food for thought. Sentiments supersedes all fundamentals. Reduce equity weightage if you are fully allocated. I'm 12% in equities and am not reducing my weightage. Probably will increase my VXX position (avg cost of $17) if the scenario played out.

Risk/Reward for the VXX trade is around 1:18. If it ever goes to august 2011 low and theorectically , VXX can go to $55, this will be a 300% return. If nothing happens and VXX slumps back to $15, it will be a -12% drop(and I may get rid of it).