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Adjusting My Portfolio for a Forced Renegotiation of Greek Debt

I’ve been following Greece’s economic woes pretty closely since the bottom fell out this year (or something along these lines) and in my opinion, the debt-plagued nation is about to go through a restructuring.  There is loads of precedent for it in emerging markets.  I went to part of high school in Argentina, my graduate school focus was developing country finance and my first Wall Street job at Chemical Bank (now JPMorgan Chase) was trading emerging market defaulted government debt.  Over the course of my adult life I’ve seen the following countries stick it to their lenders.

Argentina (2 negotiated, 1 unilateral),
- Brazil (negotiated),
- Poland (negotiated),
- Venezuela (unilateral sort of),
- Mexico (unilateral internal debt, negotiated external),
- Russia (unilateral then cured). 

Seeing a renegotiation of timing or payments by Greece and some sort of guarantee by the EU is not without lots of precedent.   It seems all but inevitable.  That said, bond prices have plenty of time to price in a partial default.

All of the countries I listed still in exist and most of them (except maybe Venezuela) are much better off today than when they restructured.  A Greek debt restructuring (aka partial default) will not be the end of the world, the Euro or Greece, but it will be an exciting ride for a while.

So how am I adjusting my portfolio?

If I saw equity valuations as historically cheap, I'd probably be hanging in there right now.  However, I do not.  According to Barrons.com the S&P 500 is trading at a P/E of around 16 and with dividend yield under 2%, so I don't see any value in the U.S. While I am not panicking or doing any total restructuring of my portfolio, I am reducing my weighting in global equities and shortening the maturity of my bond portfolios. As a US Dollar-based investor, selling European Equities seems like the no-brainer decision because the Euro is so high, and could join equities in a fall.

I'm not buying gold or precious metals.  I'll let someone else end up holding that bag of Dutch tulips when that bubble bursts.

Since I don’t necessarily want to recognize a bunch of capital gains on individual stocks, I am also buying protective put spreads on indices like the EFA Index ETF (EFA), The Vangaurd European ETF (VGK) and the S&P 500 (no need to use an ETF).

Read the disclosure and the disclaimer. They are honest and not your customary legal ease.

While I am negative, I still have some allocation to European and global equities and bonds.  I own VGK and EFA.  I am long puts on VGK, EFA, SPY and SPX.  I reserve the right to change my mind and act quickly to reverse all of this.

This particular strategy is a short term trade.  I expect the trade (not investment) to work out by the end of Summer.  Individual investors with a long-term lifetime savings plan should not following me into this trade because I will be out of it and back to my regular weightings in equities before you realize what happened.   Stick with your discipline.

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