Thursday, March 28, 2013

Cyprus: Not So Bad

Reports about Cyprus banks bailout sound like the end of the world:
Cody Willard: "Cyprus, hype-rus; losing the stock market war":
And these are not the most panicking examples.
I prefer to look at things with cold head. Here's the facts.
There is one insolvent bank (Laiki) and one, which solvency is in doubt (Bank of Cyprus). Other banks are OK, unless Laiki and Bank of Cyprus fail catastrophically (like Lehman Brothers).
Government of Cyprus already spent some money trying to save Laiki in 2012, with significant help from Russia (Russians keep a lot of money on Cyprus, private citizens and companies alike).
This time, Laiki required a lot more money. Initial plan was very strange: government wanted to skim all depositor in all banks. This caused demonstrations on the streets and rejection in Parliament. I don't know how such plan could be proposed at all. There are two possibilities I can think of: conflict of interest (corruption?) or attempt to pressure Russia into another bailout. As I said, Russians keep a lot of money on Cyprus, there is also Russian Commercial Bank (Cyprus), which is a subsidiary of big Russian bank, VTB, connected to Russian government.
Anyway, idea to rob all depositors failed. Crisis was resolved properly: small depositors (under 100000 Euros) are not losing anything, bigger depositors at Laiki and Bank of Cyprus are losing. More at Laiki, less at Bank of Cyprus. Those who say "expropriation" forget that the same scheme used in US, when bank fails. That's not expropriation, that's bankruptcy.
Now, the consequences. Offshore banking on Cyprus is over. Same thing happened in Iceland and Ireland. Most depositors will take money (whenever possible) and run. New ones will not come. Economy of Cyprus is going to be in trouble, because offshore banking was a very significant part of it. A pity, I liked the island after spending vacation there in 1994. Some Russian businesses and people are going to lose money. Reminder: there is no such place as absolutely safe bank. And that's about it. Total losses are around 12 billion Euro. That's a huge money for Cyprus, but a statistical error for EU economy. We saw today that there is order in Cyprus, on streets and near banks, no riots, no huge lines.
What will not happen. There will be no cascade failures of EU banks. At least, not related to Laiki or Bank of Cyprus. EU will not fail into recession, it's already there. Even offshore banks in other places will not suffer. Not until there is some other failure in another offshore zone. Russian money will not return to Russia, it will go to Bahamas, Hong Kong, Jersey or whatever offshore banking haven you can think of. Main thing, for me, this crisis will not affect EU economy in any significant way.
EU banks failed hard on Cyprus events. Among them my investment, Banco Santander (SAN). Today I added to this position. I will probably add more if fall continues.
I am a buyer of a panic, not a seller.
Disclosure: I am long SAN.
Additional disclosure: Positions can change any time

Thursday, March 21, 2013

Flipping Indian Fund

I added to my position in Indian Fund (IFN) today. Sounds simple, right? Not so simple. Reality is, Indian Fund has an interesting strategy. Twice a year fund helps holders to make a little bit extra money. If fund trades at significant discount, it buys shares at net asset value, if fund trades at NAV or above, it sells shares at 95% of NAV. Currently, fund trades at discount over 12%. Fund is buying shares at tomorrow's NAV (there is a fee, of course, 2%, plus something your friendly broker takes). I decided to take the offer and put part of my position on sale. At the same time, I want to keep this position, so essentially I'm flipping shares, selling them at 2% discount to NAV and buying (today) at more than 12% discount. Easy money. The only problem, this time more than 30% of outstanding shares have been put for sale, and fund buys only about 12%. I don't know exactly how many of my shares will be bought, but it's OK. Fund made me a lot of money and increased position is worth it.
Disclosure: I am long IFN.
Additional disclosure: Positions can change any time.

Wednesday, March 6, 2013

Into Shipping

It's a risky business, I know. But Jim Cramer recommended Diana Shipping (DSX) as a play on increasing international trade. That made me thinking.
I don't actually like DSX. It's specialty is bulk carriers. There are two problems here, both originated in China. First, China is trying to switch from raw material intensive economy to more efficient one. That means less raw materials (or at least not much increase in use). Another problem: in the last decade shipbuilders built way too many bulk carriers. DSX is a quite efficient company, but it's working on the saturated market. Not much potential here. No wonder DSX doesn't pay any dividends.
But there is another play on the international trade. Most of the trade goods are shipped in containers. Container shipping is increasing faster than bulk shipping, and potential for growth in here.
Decision came easy. Diana Containerships (DCIX) is a sister company of DSX. As the case with DSX, company is very transparent. On company's web site you can find information on current and future ship leases. Company's financials are in good shape, profits are increasing and dividend is stunning 18%.
I opened position in DCIX today. If stock falls down more, I will increase this position.
This is a risky investment, I wouldn't recommend it as a part of conservative portfolio. But my portfolio (except for the fixed income part) is quite risky anyway. That's why I don't recommend anybody piggibacking on my investment decisions. If you do, it's your risk, not mine.
Disclosure: I am long DCIX.
Additional disclosure: I have no positions in DSX. Positions can change any time.

Friday, March 1, 2013

Changing Trends

There are new trends in this market. For the last several years, stocks, commodities and foreign currencies moved in step. Todd Harrison even has (had?) a saying that lower dollar is a condition for higher asset classes. I always had my doubts on that, because that makes zero trade in any other (more or less stable) currency.

Things changes since January 1. Stocks are up (a lot), dollar is stable (well, it went down and now it's back up), commodities are down, a lot. Interestingly enough, commodity sell-off started with commodities which are not on everybody's screen. Agro commodities, wheat and corn first of all, are down about 15% since January 1. Same goes for base metals. Oil was up, but this week it couldn't hold the ground. Gold just can't hold the line and crashed down trough 1600 line.

What does it mean? The obvious explanation: demand for commodities is down because of slow growth in the world and crisis in Europe. At the same time stocks are up because profits are up. I am not that sure. Commodity markets depend more on traders than on real supply and demand. I haven't seen any data on huge crop in the Southern Hemisphere to justify 15% drop in agros. Don't know about gold, its price is too dependent on demand from India and China. I think that traders got tired of commodities and are reducing their long positions.

Another trend: US 10 year debt hit 2% high and went down. I was wrong predicting 1% by the end of last year, but we still might get there. If budget is cut, we will definitely get there.

Current trends tell me to stay cautious. There is nothing telling me "buy buy buy" or "sell sell sell".