PAY ATTENTION TO $17 BILLION BOND WIPE OUT IN UBS TAKE OVER OF CREDIT SUISSE

Twitter
LinkedIn
Facebook

By Nigam Arora & Dr. Natasha Arora

To gain an edge, this is what you need to know today.

Potential Contagion

Please click here for a chart of multinational investment bank UBS Group stock (UBS).

Note the following:

  • Pay attention because there is a risk of contagion from the way the UBS buyout of Credit Suisse (CS) deal is structured.
  • The chart shows a close in UBS stock of $18.20 on Friday, an early morning drop to $15.50, and a rise to $17.58 as of this writing. In Europe, the stock traded as low as $14.36.
  • The price action is in response to the shotgun marriage orchestrated by the Swiss National Bank between UBS and Credit Suisse over the weekend.
    • UBS will pay $3.3B in its stock for Credit Suisse stock.
  • The momo crowd is oblivious, but prudent investors should pay attention to these facts:
    • The buyout is a takeunder.  CS stock closed at $2.01 on Friday.  It is trading at $0.86 as of this writing.
    • In 2007, CS stock was trading over $70.
    • There is considerably more value in CS stock than the buyout price.
  • The takeunder raises the question: What do regulators know that we do not know?
  • If regulators know of something really bad that is not publicly known, typically in such a buyout the stock is wiped out and bonds are converted to stock.  Here, the stock has been given some value, but $17B of bonds have been wiped out.  This is not how it normally works.  Here is the key question: Why did Swiss regulators force the complete wipeout of these so-called tier 1 bonds, also known as contingent convertible bonds or CoCos?
    • CoCos were a tool used after the 2008 financial crisis to transfer risk from taxpayers to bondholders.
    • CoCos have been a popular investment product believed to be a safe investment.
    • Who is holding these bonds and will that lead to a contagion?
    • More than $254B of such bonds are outstanding.  Who holds these bonds and how will the holders of these bonds react to a complete wipeout? It is believed that these bonds are owned by banks, insurance companies, pension funds, and individual investors.  
  • As far as UBS is concerned, here are the key points:
    • The crown jewel of the combined operation will be a $5T global wealth management business.
    • UBS is getting these assets dirt cheap.  That is good for UBS in the long term.
    • In the near term, there is significant execution risk.
    • There was very limited due diligence, and thus, there may be additional risks that are not priced in.
    • The deal will become accretive only by 2027, assuming there are no additional risks.
    • Prudent investors should keep an eye on how UBS stock behaves.  There will be a buy signal on UBS stock in ZYX Buy for a very long term position but at a much lower price and with strict risk controls.
  • FOMC starts meeting Tuesday.
See also  GAMMA SQUEEZE IN AMD, MUSK SUES OPENAI, UNTHINKABLE MOVE ON APPLE

Wheat

Ukraine’s Black Sea grain export agreement has been renewed.  Wheat is falling in response.  Members of ZYX Short will recall a highly profitable trade  when the signal was given to short sell wheat ETF WEAT around $12 in the frenzy of momo crowd hysteria to buy wheat.  Ultimately wheat fell to the $7 range.  There may be a new signal on wheat depending upon new data.

China

Chinese President Xi is starting his three-day trip to Russia.  Prudent investors will be carefully watching for developments that may impact the markets.

Momo Crowd And Smart Money In Stocks

The momo crowd is 🔒 (To see the locked content, please take a 30 day free trial) stocks in the early trade.  Smart money is 🔒 in the early trade.

Gold

The momo crowd is 🔒 gold in the early trade.  Smart money is 🔒 in the early trade.

For longer-term, please see gold and silver ratings.

Oil

The momo crowd is 🔒 oil in the early trade.  Smart money is 🔒 in the early trade.

For longer-term, please see oil ratings.

Bitcoin

Whales have successfully pumped bitcoin over $28,000.

Over the weekend, there was again talk of bitcoin reaching $1M.  Retail investors are aggressively buying bitcoin as the narrative of bitcoin running to the stars takes hold.

Markets

Our very, very short-term early stock market indicator is 🔒.  This indicator, with a great track record, is popular among long term investors to stay in tune with the market and among short term traders to independently undertake quick trades.

See also  AN OPPORTUNITY IN SMALL CAPS OR A DANGER SIGN, ALL IMPORTANT CPI AHEAD

Interest rates are ticking up, and bonds are ticking down.

The dollar is weaker.

Trading futures is not recommended for most investors. The purpose of providing this information is to give an indication of the premarket activity that usually guides the activity when the market opens.

Gold futures are at $1978, silver futures are at $22.41, and oil futures are at $66.35.

S&P 500 futures are trading at 3959  as of this writing.  S&P 500 futures resistance levels are 4000, 4200, and 4318: support levels are 3860, 3770, and 3630.

DJIA futures are up 118 points.

Protection Bands And What To Do Now

It is important for investors to look ahead and not in the rearview mirror.

Consider continuing to hold good, very long term, existing positions. Based on individual risk preference, consider holding 🔒 in cash or treasury bills or allocated to short-term tactical trades; and short to medium-term hedges of 🔒, and short term hedges of 🔒. This is a good way to protect yourself and participate in the upside at the same time.

You can determine your protection bands by adding cash to hedges.  The high band of the protection is appropriate for those who are older or conservative. The low band of the protection is appropriate for those who are younger or aggressive.  If you do not hedge, the total cash level should be more than stated above but significantly less than cash plus hedges.

It is worth reminding that you cannot take advantage of new upcoming opportunities if you are not holding enough cash.  When adjusting hedge levels, consider adjusting partial stop quantities for stock positions (non ETF); consider using wider stops on remaining quantities and also allowing more room for high beta stocks.  High beta stocks are the ones that move more than the market.

See also  WEEKLY STOCK MARKET DIGEST: PRUDENT INVESTORS PAY ATTENTION TO NEW ECONOMIC DATA

Traditional 60/40 Portfolio

Probability based risk reward adjusted for inflation does not favor long duration strategic bond allocation at this time.

Those who want to stick to traditional 60% allocation to stocks and 40% to bonds may consider focusing on only high quality bonds and bonds of five year duration or less.  Those willing to bring sophistication to their investing may consider using bond ETFs as tactical positions and not strategic positions at this time.

To take a free 30-day trial to paid services to gain access to more opportunities, please click here.

This post was just published on ZYX Buy Change Alert.

Markets can generate substantial wealth for knowledgeable investors. NOW YOU TOO CAN ALSO SPECTACULARLY SUCCEED AT MEETING YOUR GOALS WITH THE HELP OF THE ARORA REPORT. You are receiving less than 2% of the content from our paid services. …TO RECEIVE REMAINING 98% INCLUDING MANY ATTRACTIVE INVESTMENT OPPORTUNITIES, TAKE A FREE
TRIAL TO PAID SERVICES.

Please click here to take advantage of a FREE 30 day trial.

Nigam Arora

Nigam Arora

Nigam Arora is known for his accurate stock market calls. Nigam is a distinguished master of the macro. He is a popular columnist with over 100 million page views, an engineer, and nuclear physicist by background. Nigam has founded two Inc. 500 fastest growing companies and has been involved in over 50 entrepreneurial ventures. He is the developer of Theory ZYX of Successful Change Management and is the author of the book on Theory ZYX, as well as the developer of the ZYX Change Method for Investing.

Dr. Natasha Arora

Dr. Natasha Arora

Dr. Natasha Arora has significant expertise in investment analysis especially biotech, healthcare, and technology. Natasha is a graduate of Harvard Medical School followed by a postdoc at MIT. She has published several peer reviewed research papers in top science journals.

Subscribe to 'Generate Wealth'

Free Forever

More To Explore

30 Day Free Trial

Cancel within 30 days and you owe nothing

When you take a FREE 30 day trial, you get access to powerful techniques used by billionaires and hedge funds to grow richer. You can continue to use these powerful techniques to grow richer even if you cancel your subscription. You come out ahead by subscribing no matter how you look at it.

A fortune is to be made from AI stocks.
Get the list of 18 AI stocks to grab your share of the profits — no cost to you.

A fortune is to be made from AI stocks.

Get the list of 18 AI stocks to grab your share of the profits.

AI is a $1 Trillion Market

Making A Fortune
In Artificial Intelligence

Golden Age of Artificial Intelligence