How to Trade the European Crisis Like George Soros
September 16, 1992, has gone down in history as the day George Soros broke the Bank of England. Britain’s effort to fight against the devaluation of the pound could not counteract the market forces that were driving it lower. Eventually, Britain had to withdraw the pound from the European Mechanism, the euro’s precursor.
#-ad_banner-#The investors who saw it coming profited wildly. Soros was the only one with the nerve and conviction to short-sell the largest position in pounds — an estimated $10 billion. The legendary investor made an incredible $1 billion on that so-called Black Wednesday.
How did Soros and the other traders know what was going to happen on that fateful Wednesday? Truthfully, no one knew exactly when it was going to happen, but they knew it had to happen.
Today, 20 years later, a similar situation is setting up in the euro zone that could allow savvy investors to earn outsized profits.
This is because I strongly believe Greece will have to abandon the euro. And although the rhetoric is hot and heavy, the euro will naturally suffer when this happens.
Greece is in such a downward spiral that no amount of monetary aid appears to be the solution. Worse yet, with 22% of its people unemployed (51% of those under 25), the budget cuts Greece needs to obtain aid has been voted down, again and again. I can’t say I blame them. Asking the massively unemployed to vote for less government aid is like asking a starving man to request a smaller dinner. It’s simply not going to happen.
The question is, will the Greek exit be orderly or disorderly? The truth is it really doesn’t matter. Obviously, short-term volatility will spike on a surprise, disorderly exit. However, even a planned, orderly attempt at an exit will create huge opportunities for prepared investors.
I could dig deeper into the reasons Greece could drop the euro, but I don’t have to. Investors already can make large profits from the resulting economic chaos.
My favourite way: Exchange-traded funds (ETFs). These funds allow investors to profit from worldwide economic occurrences directly in their own stock brokerage account.
My first weapon of choice to play the Greek crisis is the Pro Ultra Short Euro ETF (NYSE: EUO). This double-leveraged ETF is designed to inversely mimic the daily movements of the euro/U.S. dollar currency fluctuation.
This means for every point the euro currency drops against the U.S. dollar, this ETF should move higher by two points. On the day Greece finally leaves the euro, this ETF should rocket higher as the euro plunges on the news.
My next choice to profit from this situation is the Ultra Short MSCI Europe ETF (NYSE: EPV). This ETF is a powerful tool for sophisticated investors who are bearish on the short-term prospects of the European economy. EPV provides double-leveraged exposure to the equity markets of various Western European countries, including the United Kingdom, France, Germany, Switzerland, Sweden, Spain and Italy. Equities markets across Europe will likely plunge on a Greek default creating a sharp, positive move in this inversely-leveraged ETF.
Risks to Consider: Although I am very bearish on the future of Greece and the European Union, there remains a distinct possibility of the situation working itself out. In fact, Standard & Poor’s has just placed the odds of a Greek exit from the euro zone at 30%. This seems low to me, but the projection is well worth considering.
In addition, the two ETFs I’ve talked about are built to follow the daily movements of the underlying instruments, not the long-term trend. Use particular caution if holding one of these ETFs for very long.
Action to Take –> Both ETFs are experiencing a pullback as European rhetoric is easing fears. I still think this false sense of relief is simply a short-term market reaction. The extreme worried state will soon return.
Savvy investors should consider these two ETFs as short-term plays as economic fear re-emerges. More aggressive investors may even want to purchase options on the short Euro Zone ETFs. Adding the leverage of options on top of already leveraged products is extremely risky, but don’t forget that the greatest rewards are possible with greater risk. Just ask George Soros.