“The Greatest Trade Ever” An optimist’s guide to profiting from Armageddon (Motley Fool)

By Travis Johnson, Stock Gumshoe, April 8, 2010

The Motley Fool’s international investing newsletter, Global Gains, has been talking up Greece quite a bit of late — and they just sent an editorial team to Athens to scope out some investing opportunities. Naturally, they’d like you to subscribe to the newsletter and find out what they think the opportunities are for profiting from this “armageddon” … but they also throw a couple teases our way, so let’s take a look and see what we can figure out on our own.

Tim Hanson is helming this newsletter now, succeeding Bill Mann (I like Bill’s writing and found and his work at Global Gains and Hidden Gems in years past compelling, but he’s off running the Fool’s new Independence Fund mutual fund now (launching an expensive invest-anywhere fund right now seems a bit anachronistic, and odd for folks who have tended to eschew most pricey managed funds, but we’ll see). And most recently they’ve been largely focused on emerging markets, with high profile trips to China and India to research and pick stocks (including Dr. Reddy’s, which they’ve also been teasing recently as an Indian generic drug pick). But today, we’re looking at more of a submerging than an emerging market in Greece.

The tease is part of their “Final Dispatch” from the trip to Greece, and it builds on two of John Paulson’s big trades of recent years — I won’t laboriously copy and paste all the details, but Hanson essentially tells us that Paulson’s reputed “greatest trade” was that huge bet against subprime mortgages that made him billions in 2007 … and that the trade that’s arguably more important for us was when he swooped back in and started buying up beaten-down bank stocks.

He relates this to his own trip — recounting that he went to Greece with the idea of finding ideas for ways to profit from the collapse, betting against Greek stocks in some way to emulate Paulson’s huge bet against the mortgage bubble, but then, after a week in the country, deciding that there was more opportunity on the long side. He and his team talked to investment bankers and other sources and learned about the “smart money” that was looking for beaten-down stuff to buy, and he heard tales about the protests being overblown, and the confidence of the Greeks that they would find a way to muddle through with their austerity programs and the help (eventually) of someone, probably Germany and the EU, reluctant as those big brothers may be.

The letter includes some other references to big investors who made their name betting against a bleak outlook, including the late Sir John Templeton, who famously bought up every cheap stock in NY on the eve of World War Two, betting that the world as we know it would not end.

Here’s how Hanson puts it for Greece:

“I was surprised to discover that a second quiet consensus was building in Athens. Namely, that should the situation worsen, the EU would eventually step up with a lifeline.

“(True to form, even as we were en route home it was announced that the EU would in fact provide support if needed. Though the market’s been slow to catch up — which makes the opportunity I’m about to share with you even more time sensitive.)

“Every bit as important, in place of economic malfeasance and widespread panic, we found a determined population quietly committed to what must seem a radical new austerity plan… and a sound strategy for finding a solution within the European framework.

“To make a long story short, while we are still bearish on the euro, instead of following the ‘window dressing’ institutional herd into crowded ‘Armageddon’ short ideas, we returned from Greece with some very attractive LONG opportunities.”

Ah, so there’s the rub … what, in fact, are those opportunities? He doesn’t get into too much detail, but let’s see what we can suss out. He tells us that he has three trades, let’s look at ’em in order …

“My first ‘Armageddon’ Trade — and the most conservative — is a simple ‘pairs’-style trade involving the shares of one of the world’s great cash-generating, high-margin businesses and a reasonably priced exchange-traded fund (ETF) you can buy from your broker today.

“With this one simple trade you can execute today, you can position yourself to claim your share of the massive profits of one of Europe’s — and the world’s — top global business franchises — while simultaneously profiting from the short-term weakness I foresee in the embattled euro.”

OK, so to profit from the “embattled euro” there are a couple easy ETFs you can buy, probably the simplest one is the double short ProShares UltraShort Euro Trust (EUO) since that seems to trade with the most volume — this is designed to move up twice as fast as the Euro moves down (or, of course, vice versa — if the euro goes back up against the dollar, this will