We weren’t shocked by the massive sell-off earlier this week.
We were expecting it.
We knew Greece was trouble.
Earlier this week, traders were excited over the possibility of growth in Greece.
Shortly after the inevitable news was released, that joy turned to immediate terror, sending the S&P 500 close to its 200-day moving average.
There’s hope there’s a bottom in place now.
But we highly doubt this bottom will hold. In fact, the S&P 500 could crash to 2040… and if we’re not careful to 2000.
It’s possible. It’s why we always urge caution in this market.
What scares me is how easily we could plunge to 2000… with the next crisis already raging. Puerto Rico is now days away from an historic default after the governor said it can’t pay its $72 billion in debt. Attempts to cut expenditures and restructure debt have failed.
$72 billion…
While the U.S. Treasury Department has been providing guidance to the island, there’s no word on bailout plans. That news, coupled with Greece could have terrifying realities for financial markets and unprepared U.S. investors.
The problem is that Puerto Rico debt problems aren’t just confined to the island. Some of the biggest U.S. mutual funds have significant wagers on Puerto Rico’s municipal bonds, too.
Funds run by Oppenheimer and Franklin Resources have big exposure to this debt. They hold about $4.5 billion and $2.3 billion of the debt, respectively.
It could be a disaster for municipal bonds, while providing upside opportunity for muni bonds short ETFs, like the Market Vectors Short Municipal Index ETF (SMB).
Consider taking a position in SMB up to $18 a share.
At the same time, we can hedge our SMB bet with an oversold bond insurer opportunity.
Bond insurers like MBIA Inc. (MBI) have fallen significantly on the fear of default, too. Investors fear it has a potential for heavy losses on a promise to help backstop $72 billion of debt. We wouldn’t touch MBI shares just yet, though.
We would take a small bet on Assured Guaranty (AGO), though. It’s not often we’ll recommend a stock in this revamped service, but the opportunity is too good to pass up.
We like AGO because it has the most capital relative to its Puerto Rico exposure. It’s part of the reason why investors are beginning to bid up shares on oversold conditions. Consider taking a small position in AGO up to $25 a share.
We have to be prepared for anything in this market. As we’ve said for weeks, things are about to get excessively volatile.
Be safe out there…
Ian L. Cooper
Rapid Retirement System