First Korea, now Cyprus – Ground Control to Major Tom – what the heck is going on?

The recent series of global headlines have acted as a catalyst for action, for many an investor.  Given the progress and trading profits we have seen the markets make over the last 6 months, it stands to reason that a pause for breath is far more likely to happen, especially on knee jerk news headlines.

Korea’s decision to up its missile testing and related rhetoric, followed by a US response of increased B52 sorties generally would be expected to impact on Gold (safer haven).  Currently we are trading a calendar spread in Newcrest mining, with the expectation of a push higher in gold prices.  On the subject of B52’s – not the sort of thing you want coming at you, even though they have been in service for almost 60 years!  My parents live near a former US B52 base, in the UK, and having seen them in action in Bosnia, Gulf Wars 1 &2, and Afghanistan –  their psychological impact alone, not to mention “Armageddon capable” cargo should be enough to placate things for a while, allowing the UN’s sanctions to bite even harder in the North of the peninsular.

In terms of Armageddon, the European Central Bank’s tilt at Cypriot savings through the tax on deposits has stunned many.  The punishment of “savers” money is really quite unprecedented and sets an ominous tone for future help for those “Euro” denominated nations in need of a bail out.  In response to this scenario, we have set traps to profit from any weakening in the Euro, as the regional currency has certainly lost plenty of supporters, especially those hailing from Russia!

The actual impact of Cyprus should be minimal in the big scheme of things.  As a nation, it has a smaller economic capacity than the city of San Diego, was one comparison I heard this week – as such it is not too big to fail – to give an alternative view – Cyprus has a GDP of $12bn – Apple has a cash pile of $137bn!

However, the broader message is a far tougher stance on the part of Germany (election year) toward its failing neighbours.  If you had to find a guinea pig to experiment on – in terms of a country dropping from the Euro, Cyprus is perfect.  The consequences, like its economy are relatively small.  Notwithstanding that, “taxing” bank deposits is an unusual policy, but one which has more credibility than flying around in a helicopter throwing out money, you would think!

Ultimately, what is the downside for the European Central Bank?

If Cyprus buckled and passed through the demands, not only would the ECB get some cash to offset against its aid package, the Mediterranean Island’s reputation for being a “cash haven for the world’s money launderers” would also be in shreds (not seeing any downside from this, yet) win/win so far.  Should the ECB’s demands be rejected, Cyprus is left to die on the vine – albeit with minimal collateral damage for the Euro region itself.   A very severe case of tough love!

What’s more, should this happen, the next country that is faced with “unpalatable” demands from the ECB, in return for aid, would really have to think hard on any decision that could displease the European ring-master.

Add to this, a further serendipity is that any tax on savings should prompt the cash to hit the streets and therefore some grass roots stimulation.

Time will tell, but the dynamic of bail outs and what is being required in return appears to be changing, meantime – watch your short Euro trades.

So headlines aside, what does all this really mean for trades?
Well markets have sold down – a good thing – in response to these events.  This sell down, in our view, has shaken the less confident out, and is providing a second opportunity to get back into the market, for those who hesitated over the past three or four months.  Where to invest next becomes the question.

As I write, I note that we have put out more than a 150 trades, trade adjustments and close outs in the stock and options space, since the start of January, including covered calls, calendar spreads and ETF positions so there are plenty of opportunities out there for stock and options traders.

With a more bullish view on gold, at least over the near term, there should be scope to profit from the turmoil created by recent headlines.  Additionally, as stocks find support, fresh opportunities to re-purchase stock and/or re-sell calls will almost certainly be jumping off the screen – so keeping sharp and confident, in terms of where next for the market, is key.

Interestingly, as we saw David Bowie release his first album in a decade, I am reminded of the lyrics of a classic – not only a classic song, but a pretty good pep talk for the more nervous trader out there, when it comes to profiting from the current market:

“Ground Control to Major Tom, Take your protein pills and put your helmet on…”

Since 1998, Matthew has been involved in the Financial Services industry providing stock, option and CFD advisory services, trading advice, funds management and education services. Matt is an Authorised Representative of Halifax Investment Services, providing analysis and recommendations for trading Covered Calls in the US markets and using Exchange Traded Funds (ETFs) ...
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