The second trade was short Spain, particularly Spain’s financial sector, as best I could.  To accomplish this, I bought 1 EWP Jul12 23 Put option at $2.70.  EWP is the Spain country ETF, which has a whopping 40% exposure to financial stocks.  Spain’s banks are experiencing deposit outflows; meanwhile, the loan book is falling apart (low credit standards, housing bust, high structural unemployment).  This is also an indirect play on Eurozone rumblings (Greece, other peripheral countries).  My breakeven price is $20.30 (minus commissions).

The time frame for the ESU12 trade is short, and I will update Top Five next week once new positions are established.

This yielded me a one day profit of $819.28, as calculated by $125,000*(1.2591-1.22524) -$18.22.  As noted in last week’s post, if the situation is warranted, I may recycle this trade.

France wants to solve the issue by issuing joint debt (Eurobond), but Germany declines that idea.  The Germans have no interest in paying for the fiscal sins of other nations, especially if it has no taxing authority to recoup its investment.  As I alluded to in my 4Q11 Recap & Outlook, I believe Germany’s best course of action should be to independently leave the Euro.

Last week, I shorted the Euro and quickly covered.  Today, I am recycling the idea of that trade.

The trade:  Short 1 ECM12 contract at $1.2591.  Again, my intention is to trade out of this in a relatively short time frame and am not be updating my Top Five.  (Implied exposure, if the euro went to zero or doubled, is $157,387.50).

I’ll keep an eye on this situation, and if warranted, may recycle this trade.

As a whole, the European economies are stagnating/falling and are encumbered with massive debts.  Specific to Greece, the country has been experiencing a recession for five years.  Other fiscally profligate nations like Spain, Italy, and Ireland, are also in troublesome postions.  Furthermore, recent elections in Greece and France (Hollande) serve as rejections to austerity and fiscal pacts, and the currency is subsequently under increasing pressure.  When blood is in the water, the sharks come out to play.

The trade:  Short 1 E7M12 contract at $1.2850.  My intention is to hold this exposure for a short time period, and am therefore not updating Top Five.  (Implied exposure, if the euro went to zero or doubled, is $80,312.50).

(Image from Marketwatch)

Reasonably thinking, I am bullish on gold for three reasons.  First, gold is a safe haven asset, and investors can flock to it in times of turmoil.  Europe anyone?  Second, US real interest rates are negative.  That is, a ten year investment yields an investor only 1.88% per year, whereas inflation will be more than this.  A ten year investment in a US Treasury Bond will lose real purchasing power in ten years.  With fixed income securities and stocks offering unattractive returns (think 1970s), gold has historically appreciated as an alternative.  Third, gold price increases over the past decade have been driven by buyers in emerging asia.  Buyers in India and China represent permanent demand as investors suffer from capital outflow controls (financial repression), which I view as unlikely to abate in the upcoming years.

Gold miners extract gold from the ground and sell it at market prices.  So, if gold rises, then the revenue for gold miners increases.  To ensure that the increased revenue is captured by shareholders (and not employees’ wages or governments’ taxes), we can examine companies gross margins.  The top three companies have margins that are either stable or increasing.  Thus, increased gold prices should be flowing through the income statement as increased earnings to shareholders.

With a solid thesis for gold, and some assurance from gold miners income statements, a divergence of the metal and stocks seems illogical.  One area of blame is that analysts are forecasting gold prices at $1600 an ounce or lower.  If this is the case, then long gold miners and short gold would be a prudent position.  However, given my arguments, I’m happy to be a gold owner, even if the price fluctuates downward in the interim.

I am already long gold miners in the form of GDX, GDXJ, NEM, GOLD, GORO, and FNV.  Today, I initiated a synthetic long position, by selling a GDX Dec12 $39 Put and buying a GDX Dec12 $44 Call.  See the options-basic page for the derivation of this strategy.  The trade cost me $200.00.  I am on the hook if GDX falls below $39 and have unlimited upside if GDX advances beyond $44.

Top Five is updated to reflect my increased GDX exposure.

Today’s job numbers were a disappointment to market, and the S&P 500 dipped.  On the news, I covered my short futures position, which I initiated yesterday, resulting in a cool $507 profit.  I still retain one ESM12 short.

In the accounting world, this will classify as a wash-sale since the IRS uses the first-in first-out accounting method.  As for this trade, I shorted at $1405 and covered at $1394.50; commissions cost me $17.30.  $50*($1405-1394.50) – $17.30 = $507.70

The trade:  sold 1 ESM 12 futures contract at $1405.  Since this is intended to be a short duration trade, I will hold off from updating Top Five.

Keeping score:

With the funds, I decided to purchase 25 shares of Warren Buffett’s Berkshire Hathaway (BRK.B).  I believe Whitney Tilson is correct in his value analysis, and Berkshire has the advantage of buying on the cheap during times of crisis.  From a risk exposure perspective, this investment is part of the absolute return strategy (not equity).