I hope that you all had a safe and enjoyable Independence Day holiday! Today’s news is that the people of Greece have rejected the terms of its creditors’ by voting no in the referendum. Now it will be very difficult for this radical leftist government to come to terms on a package to maintain debt payments and ultimately stay in the European Union. Greece accounts for less than 2% of the economic output of the EU. It is very unlikely that Greece and repay its debts strictly with austerity. The economy needs to grow and this will require debt reduction from the Eurozone partners one way or the other. Everyone knows this, but it a very difficult pill to swallow and can create political challenges in countries such as Germany, The Netherlands etc.
There are so many reasons for the EU to do everything possible to keep Greece in the union. From a geopolitical standpoint, it is not in the West’s best interest for Greece to potentially cuddle up to Russia, which would likely love to continue to enhance its relationship with Greece to continue its more imperialistic ambitions. If Greece defaults, the debt is going be worth a great deal less anyways and leave the countries in the EU with huge losses. At the same time, being too lenient would likely result in copycat political parties in Spain, Portugal etc. which would argue for even better loan terms. Below are a few articles that describe the situation. Markets are likely to be extremely volatile and most likely will sell-off. The absolute key is not to panic. We are investors and are not traded. We have no exposure to Greece. The European Union has the tools to greatly reduce the risk of contagion. When volatility spikes, option prices go up. This creates great new opportunities for investments, but at the same time can cause short-term mark to market losses. As options expire, volatility goes to zero, as does time value and the only thing that matters is where the stocks are relative to the price of the options we sold. Your worst case scenario is that you will get exercised on your puts and will be well-positioned for a recovery. Psychologically if you tend to stress about short-term volatility, I don’t recommend looking at your account on a daily basis as these short-term fluctuations are meaningless unless you are taking your money out in the very near term.
The least successful investors are those that panic and get scared out of great long-term investments. It is akin to jumping out the a plane when you experience turbulence, despite knowing full well before you fly that turbulence at some point is likely. This situation reminds me a bit of 2011 when the European scare was it its fever pitch. We took short-term mark to market losses on some positions, ended up getting exercised on puts and then returned 32% and 36% in the following years. There were a few people that panicked and went to cash missing those huge gains. I believe that as earnings continue to come through strongly for our companies, the stocks will continue to rise nicely and we will do quite well over the next 3-5 years. Thank you very much and as always if we can assist you with anything, please never hesitate to give me a ring! 805-886-8140