Events Trader #54: The banking bonanza you can't miss out on
Today I want to talk about a truly colossal crisis. Something that could wipe out hundreds of banks on both sides of the Atlantic – and make you a killing in the process.
11th May 2010
The banking bonanza
you can't miss out on
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Dear subscriber,
I don't miss the stress. And I don't miss the hellish hours. But I bet the last few weeks were an absolute riot around the trading desks of the Square Mile.
I spent 15 years working in the City. And you pray for weeks like this. As panic spread from Greece to Spain to Portugal traders would have made huge profits betting against Greek bonds, shorting the Euro and riding the VIX index Wall Streets fear gauge to a 12 month high.
Angela Merkel called these people irresponsible speculators this week. And she's right. These people are jackals. Always looking to tear the meat off the next carcass.
The thing is you can join them. There is no reason why you should be left out of the feeding frenzy. All you have to know is where the next crisis will be and exactly what to do the moment it strikes. That's where I come in.
Today I want to talk about a truly colossal crisis. Something that could wipe out hundreds of banks on both sides of the Atlantic and make you a killing in the process.
This will be a bonanza that could dwarf the profits traders made this week in the City. I'll explain why in a minute. But first
US banks are on the brink over another meltdown
The stock market has rallied hard for 12 months. And with most economies emerging from recession, the toxic debt problems that sent the global banking system into meltdown seem a distant nightmare.
It won't stay that way for long. There is a major black cloud hanging over British and American banks commercial property. In the easy credit years before the meltdown, banks did huge business lending to dodgy property tycoons and financing new office blocks, warehouses and shopping malls.
And those properties have been sitting empty for a long time now. In the US, commercial property values are still down about 40% since the 2007 peak. And about 18% of all office space is now sitting vacant.
More than $1.4 trillion of loans secured by commercial properties will need to be refinaced between 2011 and 2014. And there are over £300bn outstanding in Britain. If you compare it with subprime mortgages, which totalled something in the region of $300bn, you begin to recognise the scale of the problem.
Without a major recovery in the commercial property market soon, a lot of US banks will end up with a huge burden of failed debt on their balance sheets. Many will go bust.
Hundreds of banks are about to hit the wall
In fact, it's already beginning to happen. Last year, 140 US banks failed or had to be rescued by federal regulators. Already this year, 50 have been seized by the authorities.
It's the small and medium sized banks that are being hit hardest. These institutions can no longer afford to pay the interest on all the empty office blocks they own. So they are just walking away. Default rates are going through the roof.
According to Real Capital Analytics, the default rate for commercial property mortgages held by US bank more than doubled in the fourth quarter of 2009. And the Federal Deposit Insurance Corporation has acknowledged that the number of banks on its problem list climbed to 702 at the end of 2009. In the worst days of the banking crisis, there were only 552 banks on this list.
And with a vast array of commercial real estate loans just coming up for refinancing, we will see those default rates absolutely skyrocket over the next two years.
A trade that could double or triple your money
So how can we trade this crisis? Well most of these commercial property loans are rotting on the balance sheets of small and medium sized US banks. These are the ones who were not sophisticated enough to have investment banking divisions to trade their way out of trouble.
Politically too, it is becoming impossible to justify a second bank bailout. The kitty is empty the FDIC has nearly run out of money. And because this second tier of banks is not systemically important, they can be let go to the wall without causing too much damage.
That's why I have been scouting for the best banks to short. And I will get back to you as soon as I found the best options. Those small banks in the US heartlands, which are also being hit by credit card defaults and unemployment look especially interesting.
These are also the states with the worst exposure to commercial real estate areas like Michigan, Florida and Arizona.
There are a whole clutch of small US banks that you can short through IG Index, the spreadbetting group. And the fact that 200 banks have gone belly up in the last 18 months, makes me salivate at the scale of the opportunity here.
I will get back to you on this evolving story in forthcoming issues.In the meantime, if you like you can contact me at my e-mail eventstrader@moneyweek.com.
Riccardo Marzi
Events Trader
Trader Portfolio |
OPEN TRADES |
Distressed Assets | ||||||
Issue | Tip date | Company/ Asset | Reccomendation | Price then | Price now (11th May) | Gain (%) |
EVT #2 | 19/05/2009 | Barclays XS0110537429 | Buy | 65 | 98.85 | 52.08 |
EVT #2 | 19/05/2009 | Nationwide XS0284776274 | Buy | 48 | 74.26 | 54.71 |
EVT #15 | 18/08/2009 | Barclays XS0205937336 | Buy | 60.7 | 78.3 | 29.00 |
Merger - Risk Arbitrage | ||||||
Issue | Date | Company/ Asset | Details | Price now (11th May) | Exp. Closing Date | Change (%) |
EVT #30 | 24/11/2009 | Iberia (SM: IBLA);British Airways (LSE: BAY) | Buy Iberia @ €2.02Short-sell British Airways @ 204pRatio IBLA 0.98: 1 BAY | IBLA: €2.24;BAY: 200p | Q4 2010 | 2.92% |
Other Trades | ||||||
Issue | Date | Type of Trade | Company/ Asset | Details | Price now (11th May) | Change (%) |
EVT #28 | 10/11/2009 | Long | Dragon Oil (LSE: DGO) | Buy at 447p | 430p | -4% |
EVT #32 | 08/12/2010 | Long | Readers Digest bond D | BUY ISIN US755267AF83 at 1.5c | $1.25 | -17% |
EVT #53 | 06/05/2010 | Long | BP | BUY at 572p Target 600p. Set stop loss at 500p | $545.5 | -5% |
Watchlist | ||||||
Issue | Date | Type of Trade | Company/ Asset | Details | Price now (11th May) | Change (%) |
EVT #32 | 08/12/2009 | Long | ING (AMS: INGA) | Buy it if it falls below €5.40 | €6.75 | N/A |
EVT #40 | 16/02/2010 | Long | ICAP (AMS: IAP) | Buy at 300p | 371.3p | N/A |
EVT #43 | 09/03/2010 | Long | Marine Harvest (OL:MHG) | Buy it if it falls below 4.5 Kr | 5.57 Kr | N/A |
CLOSED TRADES |
Issue | Date | Type of trade | Company/ Asset | Details | Status | Gain (%) |
EVT #2 | 19/05/2009 | Distressed asset | Lloyds XS0107228024 | Buy at 45-46 | Sold 10/11/09 at 88 | 91.0% |
EVT #3 | 26/05/2009 | Merger- risk arbitrage | Wyeth (US: WYE)Pfizer (US: PFE) | Buy WyethShort-sell PfizerRatio WYE 1 : 0.985 PFE | Merger completed 15/10/09 | 8.8% |
EVT #7 | 23/06/2009 | Merger- risk arbitrage | Schering Plough (US: SGP)Merck (US: MRK) | Buy Schering-PloughShort-sell MerckRatio SGP 1 : 0.5767 MRK | Merger completed 03/11/09 | 5.9% |
EVT #15 | 18/08/2009 | Distressed asset | HBOS XS0353590366 | Buy at 52 | Sold 10/11/09 at 99 | 90.3% |
EVT #15 | 18/08/2009 | Distressed asset | RBS XS0193721544 | Buy at 65.4 | Sold 10/11/09 at 61 | -6.7% |
EVT #16 | 25/08/2009 | Index Trading | iPath S&P 500 VIX (NYSE: VXX) | Bought at $55 - 56.50 | Sold at $43.70 on 27/10/09 | -22.6% |
EVT #18 | 08/09/2009 | Distressed asset | RBS XS0102480869 | Buy at 75 | Sold 10/11/09 at 68 | -9.3% |
EVT #19 | 15/09/2009 | Short | National Express | Short sell at 480p | Closed short at 390p 19/10/09 | 23% |
EVT #20 | 29/09/2009 | Options Trading | Vodafone | Put option Strike 140November 2009 @ 6p | Sold at 10p 13/10/09 | 67% |
EVT #20 | 26/05/2009 | Options Trading | FTSE 100 | Put option Strike 5,100November 2009 @ £1.40 | Sold at £2.25 02/10/09 | 60% |
EVT #27 | 04/11/2009 | Options Trading | Cadbury | December 2009 Put, Strike 24p / December 2009 Put, Strike 740p | Sold 10/11/09 for negligible gain | 0% |
EVT #35 | 12/01/2010 | Options Trading | Cadbury | BUY the Cadbury's March Put option, strike price 760p at 23p | CLOSE POSITION AT 3 | -87% |
EVT #37 | 26/01/2010 | Long | FTSE 100 | BUY the FTSE at 5,205 (midpoint) | Closed at 5,155 02/02/10 | Loss of 55 points |
EVT #12 | 28/07/2009 | Merger | Sun Micro | Buy Sun Micro only: 50% at $9.24; 50% at $9.15 (so average price $9.19) | Merger completed | 3.37% |
EVT #22 | 06/10/2009 | Merger | Xerox | XRX: $8.88 | Merger Completed | 5.5% |
EVT #28 | 10/11/2009 | Long | BNI | Buy BNI at $97.60 | Merger Completed | 2.7% |
EVT #23 | 13/10/2009 | Long | Ladbrokes (LSE: LAD) | Buy at 140p; double up if hits 120p: TARGET 180p | 147p | 5% |
EVT #43 | 23/02/2010 | CLOSE | VT Group | Buy at 673p | 762p | 13% |
EVT #35 | 12/01/2010 | Merger | *CLOSED* Buy 3Com at $7.64 | $7.90 (details on HP deal to follow) | Q2 2010 | 3.40% |
EVT #49 | 16/04/2010 | Short | Ryanair | *CLOSED* Short at €3.90 (stop loss at €3.90) | €3.90 | 0% |
EVT #46 | 30/03/2010 | Long | Arriva (LSE: ARI) | *CLOSED* Buy at 680p | 764.5p | N/A |
Closed average % gain | 13.31% |
Your capital is at risk when you invest in shares, never risk more than you can afford to lose. The share recommended is denominated in a currency other than sterling. The return from such shares may increase or decrease as a result of currency fluctuations. Please seek independent personal advice if necessary.
Spread betting is not suitable for everyone - ensure you fully understand the risks involved and never risk more than you can afford to lose. Prices can move rapidly against you and resulting losses may be more than your original stake or deposit.
Figures are calculated using the closing mid-prices on the date on which shares are first recommended. All gains are gross, and returns will be affected by dividend payments, dealing costs and taxes. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments.
Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Editors or contributors may have an interest in shares recommended.
Events Trader portfolio is not intended to represent the exact prices at which you could get in or out of a share. Our reference price is the price of our recommended shares at the time we wrote the recommendation. Sometimes readers will achieve better entry/exit prices; sometimes worse. This portfolio represents the value of our recommendations at the time our material is published.
Events Trader is issued by MoneyWeek Ltd. Registered office 7th Floor, Sea Containers House, Upper Ground, London SE1 9JD. Customer services: 0207 633 3604. Registered in England and Wales No 04016750. VAT No GB629 7287 94.
MoneyWeek Ltd. is authorised and regulated by the Financial Services Authority. FSA No 509798. https://www.fsa.gov.uk/register/home.do
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