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Why I’ve just shorted the market
Autumn is usually a tough season for investors. But with Spain on the verge of meltdown, this October promises to be especially bad, says Bengt Saelensminde. Here's how to profit.
October can be a bit of wrench to get through. It's not just the autumnal feel, it's also a tricky time for markets. And this year I've certainly got the jitters.
So to make myself feel a little bit better, I've just put a small short on the market.
It's not something I do lightly, and I expect to be out of it by the end of the month. But I thought I'd write to you today to tell you about it. Maybe it'll keep us both in good spirits.
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Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
This morning, sees the launch of Europe's new Europeanstability mechanism (ESM) effectively a new bail-out fund. Everyone in Europe wants Spain to rock up and take a bail-out. But Spain doesn't want to get involved...
Spain's politicians and its people see what's happening in Greece. They see that accepting a bail-out is tantamount to giving up sovereignty. The so-called Troika of ECB, European Commission and IMF act like the receivers in the case of a failing business. You take a loan. They tell you where they want cut-backs (austerity) and how they want to increase revenues (taxes). Then the public go bananas, the economy goes down the drain and the Troika increases the dose.
So Spain doesn't want to invite the witch doctor into its home. And European officials are spitting feathers. They thought they had this one in the bag. I mean, the only reason Spain has been given a little breathing space is because Mario Draghi (head of the ECB) promised to buy Spanish bonds in the market. Yields on Spanish debt have fallen out of the danger zone on the mere mention of help from Doctor Draghi. But yields are creeping up again. And that makes this situation dangerous.
You see, Draghi will only help if Spain first goes cap in hand to the Troika. He wants the Spanish to take their medicine. He wants them to invite in the IMF to police Spain's finances and make sure these bonds are repaid...
Get ready for some October nasties
I think it's a matter of time before Spain caves in.
Last week, I said that the banking industry has the most powerful political lobby in the world. And that takes the form of the central banks. Draghi is head of Europe's central bank. Ultimately his aim is to keep the banks in good shape, or at the very least solvent. And seeing as the banks are full of souring European sovereign debt, he has to find a way of keeping this paper from heading down the tubes. The way to do that it seems, is to foist more debt on the peripheries (so they can make good on their bonds) and take control of the nation's treasury.
Unfortunately for Spain's politicians, it's not for them to decide that they don't need a bail-out. It's not for the nation's citizens either. The banks have already put in motion what's going to happen.
I'm sure the bail-out will come. And I'm sure it won't be long either. But I'm worried that before Spain ultimately cedes control of her destiny, we'll have to see some market nasties. October is a good month for that.
How to spot a good trade here
Here's why now seems as good a time as any to put on a short...
Regular readers will know that I always like to throw the Bollinger band overlay onto a chart. It's the shaded blue area it's a simple technical tool that shows the upper and lower levels of where the stock or index should trade at any given time.
I like to buy when the blue line (the FTSE 100 in this case) is near the bottom of its band. And if I'm selling a position, I'll tend to do so near the top of the band.
And on the rare occasion that I short something (effectively selling), it's going to have to be near the top of the Bollinger band for me.
While the FTSE isn't hugging the top of its band, it's not far off.
And it is October after all.
I used a spread bet. If you plan to do the same, please bear in mind the dangers. A £1-a-point down-bet when the index is 5,850 will effectively give you £5,850 of financial exposure.
Now, though the provider may only ask for a much smaller deposit (£300 maybe), it's easy to see that you can lose more money than you put down.
Always multiply the index value by the number of pounds per point to see exactly what you're getting yourself into.
I'll update you on this trade in the coming weeks. But if you are interested in learning to trade, you should also sign up to MoneyWeek Trader. It's a completely free trading email written by John Burford a former rocket scientist for NASA and a superb mentor for anyone new to trading.
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Join more than 165,000 subscribers and keep yourself informed with the latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.
He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.
Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.
