Wednesday, 2 January 2008

Selling FTSE versus Buying CAC, for the long haul

Looking for some long-term trades, I am shorting the FTSE versus going long the CAC, the idea being to keep it on for the whole year, although I may get opportunistic if it goes my way far and quickly.

2y Relative Chart of FTSE versus CAC

The UK is sitting on top of a perilous and bursting debt-induced bubble, with the property market having topped out and now slipping fairly quickly. Depending on which survey you look at, property has been going down for 2-4 months, including 0.5% in December, and mortgage approvals in November were over 40% lower than the previous year. Also worth noting is a complete collapse in first-time buyers. Keep an eye on the UK Housing Bubble blog for great info on the UK economy. As an aside, I also plan to be short Sterling most of the year (my 2.00 straddle rolls off on Friday).

Now, the rest of Europe (possibly excluding Germany) has also had a huge increase in property values/speculation/consumer debt, but one country I'm interested in from the political side is France, where Nicolas Sarkozy become prime minister last year, and with a solid right-wing profile, looks set to make a good effort of modernising France. Just a couple of months ago it was taking on some of the unions, and he didn't seem to waiver particularly.

From another BBC summary:
"After a bitter battle against his Socialist rival Segolene Royal, Nicolas Sarkozy was elected President of France in May after a record turnout of 85 per cent. His platform was to effect a "moral renaissance" for France by cutting down on welfare and restoring the work ethic. By the end of the year he had unveiled nearly 100 measures to streamline France's cumbersome public administration. He has also developed a playboy image after divorcing his wife, Cecilia."

So, as the UK goes into property freefall, contracting lending, and an increasingly socialist tax-and-spend government that has taken the Current Account deficit to record levels, it should underperform neighbour economies that are willing to make painful changes to their social structure.

I had a similar trade on the DAX a couple of years ago, and that subsequently went on to SERIOUSLY outperform the FTSE as Germany reformed to make itself more competitive. My bet here is that France can do the same.

I sold the FTSE whilst it was at 6491.
I bought the CAC whilst it was at 5645.

I put on the equivalent of £20 per index point they are apart, so short about £130,000 ($257,500) of the FTSE and long about $224,000 worth of the CAC. Looking for these to get much closer together, not sure they quite get flat this year, but we'll see.


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