TDIMG Inside Edition – 9/21/2011: Shorting Europe, Silver & PIMCO’s Take on Greece

Sep 21, 2011

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The TDI Managed Growth Strategy provides a private “client-only” blog where we discuss the day and our general outlook. Areas that we cover range from current holdings analysis, economic reports, political commentary and more.

The primary purpose of the “client-only” blog is provide information so that clients for whom we manage money will have a better understanding of what is the rationale for portfolio decisions. In addition, the information is designed to be educational so that readers can learn from both our mistakes and successes.

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Update: Short Europe Equity Exposure

The EPV position is now approximately 6% (12% synthetically) of the TDIMG portfolio value.

The reasoning to hold this position is the very serious financial condition of the EU. Greece is already in a technical default and now scrambling to get a lifeline from the IMF/ECB. In fact, they need their next installment early and are looking at measures to increase taxes etc to prove they can cut the deficit. That will not work.

We are nearing another Lehman moment that all parties are desirous of avoiding. Yet, the fact that there is limited liquidity throughout the EU banking system due to mutual funds and other institution‘s lack of trust is perhaps the last straw that will break the situation wide open. Already a “coordinated effort” to provide USD loans through swaps has been arranged that gave markets a boost.

The timing was suspect as it was once again right up to the options expiration date. The swap agreement points to the depth of the problem as EU banks are now getting hit from all sides. Their balance sheets are riddled with toxic debt that is linked to the PIIGS. This is most pronounced in France, Spain and the U.K. In addition, the lack of trust that there will be a resolution that will satisfy the investment community is crushing liquidity that is the basis for how they transact. Without the ability to take in money from mutual funds and institutional investors, the system will eventually seize up.

In effect there has been an institutional run-on-the-banks.

Beyond the financial situation, there is a great deal of dissension among German voters. Merkel‘s generosity may have cost her position as there have been 5 major confidence votes among the parties that she has lost. Even as the Parliament has said that the previous bailout funds were not unconstitutional, they require that any future measure be cleared before they are agreed to. Just this weekend, there was a meeting of the EU Financial Ministers that ended with no plan to add any money or take additional steps. Germany‘s top two financial ministers have all but said that they are through being the savior for the region.

The final issue is the general weakness of the EU region‘s economies. The lack of confidence and the general global slowdown is hitting all countries. With no plans for stimulus (and little ability to provide any) there will be a continual drop in output.

The tracking index for EPV is the MSCI Europe Index (MXEU Index). Currently at 79.73, it has been chopping though a range of 79.75 76.78 as it consolidates after the huge plunge.

Regarding Silver…

Update – We actually stepped into the November $35 Put on Tuesday and reduced the position of ZSL to compensate.

Here is something that we don’t hear everyday:

Fed chief Richard Fisher told Germany‘s Frankfurter Allgemeine Zeitung that the central bank‘s vow to keep rates near 0% for 2 more years discourages companies from investing and hiring. “I do not think it is an initiative which stimulates the economy,” said Fisher, who was among 3 policymakers to dissent from the Fed‘s Aug. decision. The Fed next meets Sept. 20-21.

If you may recall, earlier this year, we proposed that the way to get the housing cycle to turn and help with the unemployment rate was to allow interest rates to rise. Fisher provides some nice backup to that thesis.

Poll: Greek default likely There‘s a 65% chance that Greece will default on its debts, according to a Reuters survey of 50 economists in Europe. Half of those predict a default in the next year. But there‘s only a 20% chance that Greece will leave the EuroZone. There are always those who disagree, like PIMCO’s Neel Kashkari who today said that probability is high that Greece will withdraw from the Eurozone.

There was a strange feel all day with the markets. It was almost as if investors were waiting on pins and needles for something to happen. So far (2:45pm) not much has been released from the two big meetings that are occurring. Over in Europe, there has been little announced and of course there is BIG hope riding on the FED coming to the rescue tomorrow.

It is looking more likely that it could be a “sell the news” event as it would take a serious amount of FED induced stimulus to move things at this point. But the real oddity was the massive out-performance of the utilities sector.

The fact that the defensive sectors were moving and the Russell 2000 Small cap is lagging is an indication that a rotation is occurring. We saw that as 7 out of the 8 stocks we own in TDIMG portfolios were down by the afternoon and 3 by 2%! WAIT……8 out of 8 as the selling pressure is continuing to press down positions.

Take a look at the change in the market dynamic just a few minutes after we snapped the above sector performance.

In just 20 minutes, there was a drop of 0.4% for the S&P 500 on no news. That was followed by more selling and then a few pops. At this point, the low volume that we are seeing is helping to put a floor under stock prices. But, if we start to see a broad sell-off occur, it is likely to be a sharp drop as there has been limited participation on the move over the past few days.

That is exactly what happened at the end of the day. All of the gains were wiped out. The NASDAQ and the Russell 2000 performed far worse. (Naz off 0.86% and the R2000 off 1.75%)

We initiated a position on Russian Equities this week. Market Vectors Russia ETF is an exchange-traded fund incorporated in the USA. The Fund seeks investment results that correspond to the price and yield of the DAX Global Russia+ Index, which tracks publicly traded companies that are domiciled in Russia. The symbol is RSX. This is a contrarian style of investing that we are using to help diversify the portfolio.

Russia is a country rich in raw material and oil and gas dominate its exports.

Trade Data (2010): Exports–$376.7 billion: petroleum and petroleum products, natural gas, woods and wood products, metals, chemicals. Major markets–EU, CIS, China, Japan. (More details on Russia –> HERE )

Below is a summary of the monthly retail sales report from the Federal Service of State Statistics in Moscow: