Adam Block's  Instablog

Anxiety about bank bailouts in Ireland may have created opportunities for investors in Spain and Portugal.  Shares in Spanish and Portuguese banks have been falling quite a bit lately.  Over the summer when there appeared to be a crisis in Greece, I bought Banco Santander and BBVA ADRs (an ADR - American Depository Receipt - is a kind of share that trades on an American that represents shares in a stock traded on foreign markets) and sold them a couple of months later for about a 33% profit.  

Santander and BBVA were great plays at the time because even though those banks are headquartered in Spain, as much half the book value and earnings of the banks comes from outside continental Europe.  BBVA for example, bought Compass Bank in the U.S., and Santander has extensive assets in Mexico.  Today those two banks look like a good buying opportunity, and I'm also following the price of a large Portuguese bank, Banco Espirito Santo (BES).  

BES doesn't seem to have any of its own enterprise-specific problems, so if there is a reason for the price to fall on fundamentals, it would be concern about the value of the bank's assets and future business prospects.  My general impression is that "Mr. Market" way over-reacts to bad news, and I find that view confirmed by analyses such as this one:  http://ftalphaville.ft.com/blog/2010/11/23/413416/european-banking-binary-bet/.  I'm also keen on the fact that BES has operations in Brazil, Macau, Cape Verde and other African Countries.  This means that investors have the chance to earn  emerging markets profits from these banks without having to pay a relatively higher prices for hot emerging market stocks. That being said, you can make some awfully big mistakes when you think your prejudices are right.

All three of these stocks trade ADRs, but if I buy, I'm planning to buy in Euros on the European exchanges.  When I bought the ADRs this summer, the Euro got as low as 1.20 to the dollar, and BBVA and Santander were both available at prices of about $9.00. Now the Euro is at more like $1.30.  This means that now matter how bad the market gets, we may not see the same prices that we saw over the summer.  If you just look at a chart for the ADRs, you're comparing apples to oranges unless you adjust for the exchange rate. 

I don't think it's reasonable at this price to take a firm position on the exchange rate - who knows if it will go up or down, right?  To my mind, it's not appropriate to look for a currency hedge because when buying this equity, because I'm going to buy it in Euros and sell it in Euros.  I have a few Euros in my account, but my brokerage will be lending me most of the Euros at about a 2% interest rate.  In a sense, that becomes a "free" option on the exchange rate (or an option that doesn't expire at a cost of 2% per year).  I can wait for rates to get lower and buy Euros, or I can wait for rates to get higher, sell the stock in Euros and exchange them for dollars.  I don't have to decide now.  Seems like a pretty good deal to me.

So when to buy?  Santander's lowest price over the summer was 7.50 Euros and today it's at 7.90, while BES is at its lowest price all year.  On the one hand, that looks good, but on the other hand, those summer prices were set against a stock market when the S&P got as low as 1020, and today we're at about 1200.  I can't tell you if that means prices will or won't go lower, but you have to form an opinion about the context.  Personally, I think I'm going to wait another day or two.  Buying stock is always risky, and buying at a lower price makes your position less risky and more profitable.  (On the other hand, Seth Klarman says you should always buy on the way down because there may not be shares available on the upswing.  I'm passing on that advice here because these banks don't represent the kind of margin of safety that Klarman demands.)

Extra uncertainty in South Korea, Europe and U.S. Stocks should drive bond prices higher.  I and many others (for example Doug Kass, see http://www.thestreet.com/story/10914058/1/the-best-of-kass.html) think treasuries are way too high, and we've both bought TBT, which is a short ETF that moves inversely to Treasury prices.  TBT should fall today, so buying in TBT is one way to take advantage of this news.



Disclosure: Long TBT, considering long positions in STD, BBVA, BES and BKSEY

Wheat prices have increased dramatically in the last two weeks on news that key wheat-producing areas of Russia were experiencing drought and fires.  

To me, this looked like a commodity bubble, and I wanted to move against it.  The problem is from a discrete production area, not with the whole market, and purchasers of wheat will have plenty of time over weeks or months to substitute away from wheat and towards other grains.  Moreover, I'm usually willing to bet the the sentiment in the news is an overreaction, and I think that's proving to be the case.   

Rather than trying to trade a futures market that I don't know very much about, I started googling and found an ETF designed to short wheat prices, ETFS Short Wheat (SWEA).  SeekingAlpha does not seem to recognize the ticker symbol, so here's a link: http://www.etfsecurities.com/csl/short/etfs_wheat_sh.asp.  The ETF owns a basket of derivatives that try to invert the performance of the Dow Jones-UBS Wheat Sub-Index.  

I know there are quite a few unusual investment risks with owning an ETF that's not associated with real assets, see "Hinde Capital on Whether GLD is a CDO in disguise" at http://www.zerohedge.com/article/hinde-capital-whether-gld-new-cdo-disguise, but I decided to go ahead and purchase anyway.  Also, as today's record shows, SWEA is a very thinly traded security, so there's is liquidity risk.  (Personally, I don't need the liquidity, so if it depresses prices for other people I would be more interested in buying).
 
Wheat prices rose last Wednesday, Thursday and Friday, I bought my in allocation in three or four purchases, each small enough that I could keep going.  I was lucky to be awake and at my computer early enough last Friday to catch a dramatic momentary rise in prices that sent the ETF way down, too.  Prices fell pretty quickly after that and I was up as much as 10% on the whole position, but then rose this week.  I have a feeling that some of that comes from investors moving money in to commodities because stocks aren't performing and bonds are overpriced.

Short ETFs are a new product for me and I'm not a commodities guy, and even though I think of myself as an aggressive conservative value investor who likes to learn as much as possible before getting in to something, this time I decided to leap before I looked.  What do y'all think?  


Disclosure: Long on SWEA