Events Trader #57: Get ready for a Euro rebound

Today I want to explain exactly why the fears driving the market are so irrational. And I’ll also take a closer look at BP’s woes and the exciting opportunity on the back of the Prudential deal.

Image removed.

1st June 2010

Get ready for a Euro rebound

Dear subscriber,

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

This is a great time to be a trader.

Over the last month, we have seen investors panic over a series of completely disconnected events the stability of the Euro, the oil spill in the Gulf of Mexico and ructions in East Asia.

As each story has unfolded over days and weeks, the markets have seesawed in panic, relief and then panic again.

And when fear overtakes the market, it is open season for traders. I think if we play the current instability correctly, it should provide us with the bulk of the profits we'll make this year. I'm talking about an opportunity that comes around once a year.

Why is that? Because the kind of fear that is upsetting markets at the moment, can disappear overnight. In fact the market could return to normality a lot sooner than you might think. Today I want to explain exactly why the fears driving the market are so irrational.

And I'll also take a closer look at BP's woes and the exciting opportunity on the back of the Prudential deal.

No Doomsday for Europe

The Euro is sinking today tumbling to a fresh four year low against the dollar. Investors are fixated with the prospect that the Euro could disintegrate as a default in Greece sends a panic wave through Portugal, Spain and Italy.

Now this could happen. But not in the next few months. The Greek bailout has bought Europe a couple of years. And in this space of time, the market can go up and down a dozen times.

Let's not forget the financial firepower of France and Germany, the two European members keenest on integration and the creation of a Super-European State.

The end result of the current crisis, could be a return to normality with the higher risk countries (Greece, UK, Italy, Spain, Ireland and Portugal) paying more interest on their public debt.

In fact, what we are seeing is the unwinding of the convergence trade that started ten years ago and led to the bonds of every single country in Europe to converge to yield a fraction more than the German bund. This was another product of the cheap liquidity and low interest rates that we enjoyed over the last decade.

This is not a systemic threat to the capitalistic system like the banking crisis. It will tip a few countries into recession by raising interest rates. But the system is not yet broke, it can chug along for a few more years. And at least in the short run, that could mean a rebound for the Euro from current levels.

If we have economic stagnation that prolongs beyond 2012 then we need to worry about default, but by then we would have been in and out of the market a number of times, making great trades along the way. I'll get back to you as soon as I think it is worth getting in a trade on the Euro or anything else that is suffering for irrational panic.

For now let's turn to the latest developments with the Prudential deal. Some interesting stuff here for us to get our teeth into.

Two ways to profit from the Prudential mega-deal

Prudential is having a rough time with its effort to buy up AIG's Asian insurance wing at the moment. It is not looking good for the deal. Lucky for us, there may be a great opportunity to pick up the pieces if it hits the wall.

Lets start with the latest developments. A couple of weeks ago on the eve of the publication of the prospectus for the massive right issue needed to finance the acquisition of AIA, the FSA decided to step in and asked for more time to evaluate the deal.

In particular the FSA is worried that the capital tied up in the local subsidiary of AIA is not freely movable within the group and could not be deployed where needed. The FSA is worried that if Prudential Thailand is hit by a loss and needs capital to cover the losses Prudential Group will not be able to use the capital it holds in Prudential Vietnam or Prudential Hong-Kong because it is tied up in the local subsidiary and cannot be moved. This in turn could trigger a serious crisis.

Against this backdrop institutional shareholders have started to revolt over the deal, saying that AIA is overvalued and threatening to scupper the deal by voting against the rights issue at the Extraordinary Shareholders Meeting that is due to take place on the 7th of June.

Institutional shareholders representing nearly 20% of the company have said that they will vote against the deal on the basis that the price for AIA is too high.

In my view these institutional shareholders are very, very unhappy because they face an unpalatable dilemma - either they stump up a massive amount of cash (which is very scarce at the moment) or they face a massive dilution during this right issue and that is the reason they are opposing the deal.

Our strategy, if the deal goes ahead, is to subscribe to the cheap stock in Prudential once the right issue is under way. Given the size of the issue, I believe that it will be a huge amount of downward pressure on the share price a great entry point for us.

But if it doesn't go through, there is another great way to profit from this deal. And it's due to a detail in the deal that many won't have picked up on. The day of the deal was announced, Prudential has hedged its dollar exposure for $35.5bn.

Now if this deal doesn't go through, there will be no need for Prudential to have such a large position in dollars. This means that in the market there will be a net buyer of £24bn Pounds sterling ($35.5bn) and that should be enough to move the pound rise against the dollar.

Remember that on the 1st of March when the Pru announced the deal the pound fell from 1.54 against the dollar to 1.5 - a monstrous move by any standard. It is not unreasonable to expect another move of the same magnitude if voters scupper the deal on June 7th.

So if the deal officially fails use a Forex account or a spread betting account to take out a long position in the Pound against the dollar - one that makes money if the pound rises from say 1.44 to 1.5 against the greenback. Of course I will send out a short note to warn you and to give you levels and targets as we approach the June 7th vote.

You should stick with the BP trade

Finally, a word on BP another victim of the irrational fear in the market. BP has been sold off sharply after the latest failed attempt to stop the leak in the Gulf of Mexico.

It is difficult to pick up the bottom with these types of stories and so far it looks like we have been too early. But I will stick to this trade. Bp will not go bust as a result of a leaking oil pipe. And deep sea exploration will not stop because the alternative are unpalatable for the US. Either they use less oil to power their economy and their cars or they pay money to import oil from hostile governments such as Venezuela or Saudi Arabia.

The critical point here is that BP is trading at 6 times earnings and 9% dividend yield. We are not into an internet stock at 100 times earnings or a takeover candidate at 25, both of which can fall heavily as the fundamentals are much lower. Here the fundamentals (10 times earnings and 5% yield) point to a much higher price around 600p.

Investors fear that the cost of the cleanup operation and criminal damages could run into the tens of billion of dollars for BP. But they forget that Exxon after the Exxon Valdez disaster in 1989 has appealed against the $5bn fine (or 1 year profit) imposed by the US government for years. Two years ago they got the $5bn slashed to $500m in the courts.

There is a huge amount of irrational fear holding down the BP price. Time to sit tight on this one. If you want to get in touch you can mail me at

Image removed.

Riccardo Marzi

Events Trader

Swipe to scroll horizontally
Trader Portfolio
Swipe to scroll horizontally
Swipe to scroll horizontally
Distressed Assets
IssueTip dateCompany/ AssetReccomendationPrice thenPrice now (1st June)Gain (%)
EVT #219/05/2009Barclays XS0110537429Buy6599.12p52.49
EVT #219/05/2009Nationwide XS0284776274Buy4872p50
EVT #1518/08/2009Barclays XS0205937336Buy60.776.03p25.26
Swipe to scroll horizontally
Merger - Risk Arbitrage
IssueDateCompany/ AssetDetailsPrice now (1st June)Exp. Closing DateChange (%)
EVT #3024/11/2009Iberia (SM: IBLA);British Airways (LSE: BAY)Buy Iberia @ €2.02Short-sell British Airways @ 204pRatio IBLA 0.98: 1 BAYIBLA: €2.24;BAY: 200pQ4 20103.71%
Swipe to scroll horizontally
Other Trades
IssueDateType of TradeCompany/ AssetDetailsPrice now (1st June)Change (%)
EVT #2810/11/2009LongDragon Oil (LSE: DGO)Buy at 447p409p-9%
EVT #3208/12/2010LongReaders Digest bond DBUY ISIN US755267AF83 at 1.5c$1.25-17%
EVT #5625/05/2010LongBPBUY at 485p Target 615p.430p-11%
Swipe to scroll horizontally
IssueDateType of TradeCompany/ AssetDetailsPrice now (1st June)Change (%)
EVT #3208/12/2009LongING (AMS: INGA)Buy it if it falls below €5.40€6.47N/A
EVT #4016/02/2010LongICAP (AMS: IAP)Buy at 300p387pN/A
EVT #4309/03/2010LongMarine Harvest (OL:MHG)Buy it if it falls below 4.5 Kr5.34 KrN/A
Swipe to scroll horizontally
Swipe to scroll horizontally
IssueDateType of tradeCompany/ AssetDetailsStatusGain (%)
EVT #219/05/2009Distressed assetLloyds XS0107228024Buy at 45-46Sold 10/11/09 at 8891.0%
EVT #326/05/2009Merger- risk arbitrageWyeth (US: WYE)Pfizer (US: PFE)Buy WyethShort-sell PfizerRatio WYE 1 : 0.985 PFEMerger completed 15/10/098.8%
EVT #723/06/2009Merger- risk arbitrageSchering Plough (US: SGP)Merck (US: MRK)Buy Schering-PloughShort-sell MerckRatio SGP 1 : 0.5767 MRKMerger completed 03/11/095.9%
EVT #1518/08/2009Distressed assetHBOS XS0353590366Buy at 52Sold 10/11/09 at 9990.3%
EVT #1518/08/2009Distressed assetRBS XS0193721544Buy at 65.4Sold 10/11/09 at 61-6.7%
EVT #1625/08/2009Index TradingiPath S&P 500 VIX (NYSE: VXX)Bought at $55 - 56.50Sold at $43.70 on 27/10/09-22.6%
EVT #1808/09/2009Distressed assetRBS XS0102480869Buy at 75Sold 10/11/09 at 68-9.3%
EVT #1915/09/2009ShortNational ExpressShort sell at 480pClosed short at 390p 19/10/0923%
EVT #2029/09/2009Options TradingVodafonePut option Strike 140November 2009 @ 6pSold at 10p 13/10/0967%
EVT #2026/05/2009Options TradingFTSE 100Put option Strike 5,100November 2009 @ £1.40Sold at £2.25 02/10/0960%
EVT #2704/11/2009Options TradingCadburyDecember 2009 Put, Strike 24p / December 2009 Put, Strike 740pSold 10/11/09 for negligible gain0%
EVT #3512/01/2010Options TradingCadburyBUY the Cadbury's March Put option, strike price 760p at 23pCLOSE POSITION AT 3-87%
EVT #3726/01/2010LongFTSE 100BUY the FTSE at 5,205 (midpoint)Closed at 5,155 02/02/10Loss of 55 points
EVT #1228/07/2009MergerSun MicroBuy Sun Micro only: 50% at $9.24; 50% at $9.15 (so average price $9.19)Merger completed3.37%
EVT #2206/10/2009MergerXeroxXRX: $8.88Merger Completed5.5%
EVT #2810/11/2009LongBNIBuy BNI at $97.60Merger Completed2.7%
EVT #2313/10/2009LongLadbrokes (LSE: LAD)Buy at 140p; double up if hits 120p: TARGET 180p147p5%
EVT #4323/02/2010CLOSEVT GroupBuy at 673p762p13%
EVT #3512/01/2010Merger*CLOSED* Buy 3Com at $7.64$7.90 (details on HP deal to follow)Q2 20103.40%
EVT #4916/04/2010ShortRyanair*CLOSED* Short at €3.90 (stop loss at €3.90)€3.900%
EVT #4630/03/2010LongArriva (LSE: ARI)*CLOSED* Buy at 680p764.5pN/A
EVT #5204/05/2010*CLOSEDLongNokiaBuy at €9.04 Target around €10. Set stop loss at €8.40STOP LOSS TRIGGERED AT €8.40-7%
EVT #5306/05/2010*CLOSED LongBPBUY at 572p Target 600p. Set stop loss at 500pSTOP LOSS TRIGGERED AT 500p-13%
Closed average % gain-21.89%

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.

2010 MoneyWeek Ltd.

Add us to your safe senders list:

Make sure you never miss your issue of Events Trader by adding us to your safe list. Learn more about whitelisting.

Email address change?

Click REPLY and type COA in the subject field then SEND. Please send your name and your old and new address in the message.

Contact Us:

To contact MoneyWeek Ltd, please send an Email to our customer services department at: