Margin Call: A Lesson For Us All


"In order to protect ourselves, our preference is to build our own personal stash of physical gold and silver, a stash that we can get our hands on quickly."

It's that time of the year again when I need to treat my better half by way of a trip to the movies. When I suggested that we see "Margin Call" she reminded me that the last treat was "Wall Street" and before that it was "Inside Job" and before that it was "The Boiler Room." Alas, I've been rumbled. In order to sweeten the deal I had to throw in a lunch at the Cafe Mediterranean; it's a tough life!

Anyway, "Margin Call" is a 2011 American independent drama film, written and directed by J.C. Chandor. The film has an ensemble cast that includes Kevin Spacey, Demi Moore, Paul Bettany, Jeremy Irons, Zachary Quinto, Stanley Tucci, Simon Baker, and Penn Badgley. The film takes place over a 36-hour period at a large investment bank (loosely modeled on Lehman Brothers) and focuses on the financial crisis of 20072008. The film follows the actions taken by a group of employees during the financial collapse according to Wikipedia.

The number one take away for us was the fact that they realized that they were holding an enormous sack of toxic waste and had to do something about it. They were aware that the disposal of these toxic assets would in fact bankrupt some of the purchasers, but they pushed ahead as it's a case of dog eat dog, kill or be killed.

This got us around to thinking about just how many more of these enterprises are out there sweating buckets as they are also managing portfolios that aren't worth a jot. If we stand back and take a look at the bigger picture we can see that a number of countries are in similar position. Take Greece as an example, who but a select few knew that it had huge debts that did not appear on its balance sheet. And just a two week ago Spain didn't require a bailout and here we are watching as $125 billion is pumped into Spain in order to save the day. When we ponder what lies behind some of these "creative" balance sheets it is enough to give us all nightmares. The truth will out, as the old adage goes and it will be damn right ugly when it makes an appearance.

Of the many smaller points and messages the movie contains one that hit home for us was the way that employers use an employee's entitlements as leverage to coerce them into doing what the enterprise requires. It is worth remembering that future bonus promises, stock options, pension provisions and health care plans are still just paper assets and the promise that stands behind them can be broken and that paper can become worthless at the behest of those employers. Its blackmail there is no other word for it.

So what can we do about it?

In order to protect ourselves from such slings and arrows of outrageous fortune our preference is to build our own personal stash of physical gold and silver, a stash that we can get our hands on quickly and which is also out of the reach of such employers.

The precious metals mining sector is very popular with many of our readers and we also have a substantial stake in this sector of the market. However, it was acquired some time ago and we are not buyers at the moment largely because of this sectors inability to keep pace with the price of gold. That could all change and suddenly, but for now we have no intention of increasing our exposure to the stocks. For those who want leverage to gold prices there are a number of possibilities in the options arena that can be considered.

One such vehicle is SPDR Gold Trust (ETF) (NYSE.ARCA:GLD). The investment objective of the Trust is for the shares to reflect the performance of the price of gold. The shares are designed to provide investors with a way to invest in gold and the number of shares traded is around 6/7 million per day, so the liquidity is there for those investors who need to move quickly. The stock is not for us, but as a proxy for gold the open interest in the more popular options series runs into many thousands of contracts, thus enabling the nimble trader to move in and out of positions with relative ease. There are always exceptions to the rule of course, so traders need to stay on their toes when speculating in this manner.

For speculators who prefer the silver market, a trust similar to the above exists in the form of iShares Silver Trust (ETF) (NYSEARCA:SLV). Again the attractiveness of this vehicle is the liquidity which provides ease of access and exit.

Stocks can also provide the opportunity to trade via the options route, however, as they are much smaller then the liquidity is also a lot thinner, making it a tad more difficult to trade, but it can be done and with considerable success.

Think independence, protection and survival, its going to get worse before it gets better and we need to get through it with the least number of bumps and bruises as possible.

Take care and try to enjoy each day.

Bob Kirtley

Disclaimer: or makes no guarantee or warranty on the accuracy or completeness of the data provided. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This letter represents our views and replicates trades that we are making but nothing more than that. Always consult your registered adviser to assist you with your investments. We accept no liability for any loss arising from the use of the data contained on this letter. Options contain a high level or risk that may result in the loss of part or all invested capital and therefore are suitable for experienced and professional investors and traders only. Past performance is not a guide nor guarantee of future success.

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