Rally Leaves Spanish Banks Behind

Stocks are firing on all cylinders today, with the S&P 500 index up more than 1.4% as I type this and most heat maps showing nothing but various shades of green. Even European stocks are strong today. With Europe’s exchanges closed for the weekend, the European country ETFs have followed the U.S. markets higher, though Spain’ ETF (EWP) has been a laggard.

Look at the ADRs for Spain’s banks, however, and it appears that the banks are not participating in today’s rally. Spain’s largest bank, Banco Santander (ticker SAN, previously STD until one month ago today) had managed a gain of just 0.03 today, while the country’s #2 bank, Banco Bilbao Vizcaya Argentaria (BBVA), is off 0.04.

In short, it appears that no matter what the U.S. markets do or the euro zone leaders say or do, stocks for these Spanish banks continue to act as if they are swimming in concrete shoes.

The chart below shows the price action in BBVA since the beginning of 2011, as well as a study on top of the main chart that tracks the performance of BBVA relative to SPY for the same period. In the ratio chart study, I have thrown a 200-day moving average of BBVA:SPY (solid blue line) to underscore that not only has the trend been consistently down, but the ratio has not even come close to trading over its 200-day moving average at any point in the past 1 ½ years.

For the record, the chart for SAN and the SAN:SPY ratio is equally ugly and a similar chart of EWP:SPY is no better than a chart of the Spanish banks.

It remains to be see how the situation with Spain and its banks will be resolved, but until there is some sort of resolution on the horizon, I would to continue to expect to see considerable activity in the puts of SAN and BBVA.

Related posts:

• Chart of the Week: As Goes Spain…
• Why Not Point Hedges?
• Banco Santander Finally Tackles One Huge Problem: Its Ticker
• Euro Volatility and Risk
• Chart of the Week: VSTOXX, VIX and the Risk of Global Contagion
• The Hollande Discount
• Chart of the Week: European Stocks Holding Up Well
• Recent Performance Divergence in European ETFs
• Where and When Will the Euro Bottom?
• Greece, Spain and the Pulse of European Anxiety
• Spain Rallies

[source(s): StockCharts.com]

Disclosure(s): short SAN and BBVA at time of writing

Banco Santander Finally Tackles One Huge Problem: Its Ticker

With Spain firmly in the crosshairs of Act N+1 of the European sovereign debt crisis, it was with great comfort that I noted yesterday’s announcement from Spain’s largest and most important bank, Banco Santander (STD), that the company was finally addressing what I considered to be a seriously overlooked problem, its ticker symbol. After kicking the can down the road for what must have been countless meetings and conference calls, the marketing and PR people can finally claim a small victory now that Banco Santander has indicated it will change the NYSE ticker symbol of its American Depositary Shares from “STD” to “SAN” effective at the commencement of trading on June 14, 2012.

In the meantime, traders continue to favor STD puts and puts from Spain’s second largest bank, Banco Bilbao Vizcaya Argentaria (BBVA), both of which have a more liquid options market than that of Spain’s ETF, EWP.

The top chart below shows put activity (red columns in bottom section of graph) ramping up in STD over the course of the last two weeks or so. The lower chart, however, puts recent options activity in the context of the August-October peak in the sovereign debt crisis, with a graphic that dates from July 1, 2011 and shows peak put activity (28.791 contracts per day) and implied volatility (111) dating from the week of August 4 – August 11, 2012.

As far as options traders are concerned, the current situation, while fraught with potential land mines, still pales in comparison to the challenges on the horizon six months ago.

Of course a new ticker won’t help address the underlying problems facing Banco Santander and Spain as a whole, but at least it might cut down on the snickers…

[VIX and More occasionally tilts at humor.  For more on these efforts, check out posts with the “lighter side” label.]

Related posts:

• Why Not Point Hedges?
• Chart of the Week: European Stocks Holding Up Well
• Recent Performance Divergence in European ETFs
• Where and When Will the Euro Bottom?
• Greece, Spain and the Pulse of European Anxiety
• Spain Rallies
• Global Bank Stocks in a Post-Lehman World

[source(s): LivevolPro.com]

Disclosure(s): short STD and BBVA at time of writing

Why Not Point Hedges?

When most people think of hedges, they think in broad terms like hedging an entire long equity portfolio with SPX/SPY puts or VIX calls or some similar product. The thinking is typically that it is better to have broad-based protection against a bear move in stocks and/or a spike in volatility than to build only one castle wall facing the direction in which an enemy attack is expected. More often than not, it is the unexpected that wreaks havoc on a portfolio, not the white swan that slowly morphs into ivory, then light gray, then…

I might as well say this up front: I hate hedges. I love the idea of hedges, but when it comes time to pay for one, they invariably come across as more expensive than even a reasonably effective market timing strategy. Of course, there are all kinds of hedges, from those that are limited to disaster protection insurance to those that are intended to counteract even the slightest nick to a portfolio. If I feel like I can get my hedges at a discount (Groupon, are you listening?) then I will gladly ante up and enjoy the safety net.

Now there are some out there who think that some of the risks to stocks, particularly domestic equities, are being exaggerated by most investors. Those who hold this opinion might be better served to avoid a broad-based hedge and think in terms of what I call a point hedge. Simply stated, a point hedge is a rifle approach to portfolio protection rather than a (full perimeter) castle wall approach.

Perhaps an example will help to illustrate the point hedge approach. Let’s assume that an investor thinks that the U.S. economy will do better than the doomsayers predict and even fulfill James Altucher’s prediction, which was far-fetched at the time, that the SPX will hit 1500 in relatively short order. If that’s the case, then should the rifle be aimed? Let’s further assume that this bullish investor is primarily concerned about a worsening conflict between Iran and Israel, Spanish fiscal issues starting to resemble the Greek crisis, a possible hard landing in China and the rise of cyberwarfare.

Rather than construct a broad-based hedge, it is possible to create a more cost-effective portfolio hedge by aggregating point hedges across all four areas of concern. For Iran and Israel, something like a long position in Brent crude oil (BNO) might do the trick. As far as Spain is concerned, purchases of puts in the country ETF (EWP) would be appropriate, but a more liquid and perhaps more targeted approach might be long puts in Spain’s largest bank, Banco Santander (STD). There are many alternative approaches in China, but certainly a short position in FXI or some long puts in that ETF is one approach worth investigating. Last but not least, cyberwarfare presents a different set of problems, but some of the firms where call purchases might be hedges against a spike in cyberwarfare are SAI, CHKP, FIRE, FTNT and SYMC.

Of course this is just one of many potential list of threats to the stock market and possible point hedges that might be used to counteract them. Even if you prefer the blanket coverage of a broad-based hedge, it is usually worth the time and effort to draw up a list of potential threats and stocks/ETPs that might be employed to counteract those threats or perhaps even provide some speculative gains.

On a related note, I realize that I have only periodically been applying the “hedging” label to my posts, so I reviewed quite a few posts in the archives and have begun to retroactively apply that label to those posts (such as several in the list below) which might be of particular interest to financial archeologists.

Related posts:

• Dynamic VIX ETPs as Long-Term Hedges
• Comparing SPLV and VQT
• Three New Risk Control ETFs from Direxion
• The Case for VQT
• The Year in Safe Havens
• The VIX as a Hedging Tool
• Global Bank Stocks in a Post-Lehman World
• Reflections on Investing Ten Years Ago
• The Dangers of Anticipating a Market Reversal
• Availability Bias and Disaster Imprinting
• The Gap Between the VIX and Realized Volatility

[graphic: Scaliger Castle, Sirmione, Italy – Library of Congress]

Disclosure(s): long FIRE at time of writing

Global Bank Stocks in a Post-Lehman World

I get tired of talking about the banks, but it is the story for the foreseeable future. While Citigroup’s (C) common stock flirts with the 2.00 line (can we call it Bank of Mendoza?) and insists it has not had conversations with the government about nationalization, Bank of America (BAC), whose stock is barely above the 3.00 level, is also out saying, “We see no reason to nationalize a bank that is profitable, well capitalized and actively lending.” Add to the financial stew a Wells Fargo (WFC) stock under 10.00 for the first time since 1996 and it is hard not to be obsessed by the banking sector.

For all the discussion of U.S. banks, I wish to turn to the global scene. Lately U.K. banks and Irish banks have been the target of rumblings about possible nationalization, so I am going to skip over banks from these countries and instead focus on the largest banks in two critical European countries (Germany and Spain) and two critical Asian countries (Japan and South Korea). These four banks are Deutsche Bank (DB), Banco Santander (STD), Mitsibushi UFJ Financial (MTU) and Kookmin Bank (KB). All four banks happen to trade in the U.S. via American Depository Receipts (ADRs).

In the chart below, I have graphed the performance of all four giant banks since the last week in September, when the ripple effects of the Lehman bankruptcy and nationalization of AIG began to be felt across the globe. Not surprisingly, all four banks have seen their stock prices fall by more than 50%, with Deutsche Bank the worst performer among the group and Mitsibushi UFJ Financial feeling the least amount of pain. For comparison purposes, most of the Irish and British banks are down more than 90% during the same period.

The global banking crisis obviously has a long way to go before anyone can say with confidence that it is behind us. In the interim, even a medium-sized bank from a country most U.S. investors are not watching closely can lead to another tipping point that puts the global financial system closer to the brink. Investors seeking to keep a weather eye on global financial firms may also wish to monitor closely the iShares Global Financials ETF (IXG).

[source: BigCharts]