A Deal!

Yay! The Eurozone is saved!

Private investors have agreed to a 50% haircut on their Greek debt... but is it really a 50% haircut? As ZH reports:

• Greece has €350 billion in total debt including about €70 billion in Troika "post-petition" loans; these are untouched.
• Of the €280 billion, roughly €75 billion is held by the ECB: this, like the Troika loans, will be untouched.
• This leaves just ~€200 billion in actual debt to undergo a haircut.
• Apply a 50% haircut to this debt (ignoring the fact that of this about €35 billion is held by Greek pension funds, and once the realization that Greek pensions have been cut in half dawns upon the population, the result will be the biggest riots ever seen in Athens yet).
• Total debt to be cut: just about €100 billion.
• Hence, of the total €350 billion, just €100 billion is eliminated, most of it used to backstop and service Greek pension and retirement obligations
• €250, or the residual, of €350, the original, means 72%, or a 28% haircut.
  
• Greek GDP was €230 billion on December 31, 2010 and declining fast.
  
• And that is how a 50% haircut is "cut" almost in half

The real question is... how is this going to affect the banks that are holding on to massive amounts of Greek debt? Many of them are currently under review for credit downgrades... this will only be fuel to the contagion fire.

Opportunity Knocks

Another great chart by ZH.

What can you do with this chart? The possibilities are endless. Let me give you some background first.

This past Friday(9/30/2011) was the last day of the quarter, as well as the last day for redemptions to be filed with hedge funds. Because of the volatility of the marketplace recently, fear is drowning out greed as people are moving their risky assets to safer ones as well as hoarding cash. This means that a good amount of people want out of hedge funds, and would prefer safer investments like Treasuries (beware of Treasuries - read a couple posts below). With redemptions comes the need to raise cash to pay back to investors. Thus comes the power of this chart.

Using your own methods, you can decide what stocks will probably take a hit while hedge funds are trying to raise cash and dump stock. Realize that multiple funds will be wanting to get rid of overlapping positions, and there is a first mover advantage to this (higher exit price).

Some things worth considering are:

• Size of positions in stocks
• Liquidity of stocks (use the higher liquidity ones as a signal of selling - then short lower
  liquidity stocks)
• Past returns (hedge funds would prefer to book profits rather than cut losses - sell stock that have had positive returns as opposed to writing off losses)

I'll let you come up with your own strategy, as I have my own. I'm providing you the tools and train of thought to profit from this, please take advantage and also bounce ideas around with me.

Risks:

• Hedge funds might sel off some of one stock, but not the one you short
• Game Theory - Anticipate moves and counter them before-hand
• Liquidity - Hedge funds might not liquidate stocks that take a while to get rid of
• Dark Pools - stocks get traded off the exchange among diff funds, usually in big blocks

My guess is that there will be a lot of mixing in the dark pool, most likely at discounts that will be somewhat reflected in the price. Use quickly liquidated positions as signals for slower liquidation stocks. Stay alert, do your homework, check out implied volatilities - take advantage of cheap options.

There's a rough road ahead, let's take advantage of it!