Thursday, 18 March 2010 00:00

The Greece and the Greek Banks Get the Word "First" Etched on the Side of Their Domino

The Greek Tragedy is unfolding pretty much as I expected. Readers, at least (if not Greek citizens) should be comforted to hear that things are going as anticipated. From CNBC: Greek Bank Shares Fall on EU Support Worries

Greek bank shares fell more than 4.0 percent on Thursday, underperforming the broader Greek market, on worries Greece may be forced to turn to the IMF to deal with its debt crisis for want of EU aid.

"There are concerns over the lack of concrete EU support and because Greece seems to be dragged towards the last resort, which is the International Monetary Fund," Cyclos Securities analyst Constantinos Vergos said.

Shares in National Bank, which reports full-year results after the market's close, were down 3.8 percent to 15.03 euros, withAlpha Bank shedding 4.1 percent.

"The IMF scenario was off the table but now seems to be coming back, raising question marks as to what this would entail," said analyst Nikos Koskoletos at EFG Eurobank Securiries.

For those subscribers who didn't get to act on my Greek bank warning a while back (see Banks exposed to Central and Eastern Europe and Greek Banking Fundamental Tear Sheet), don't fret. If I continue to be correct, this is but the tip of the iceberg, subscribers see Greece Public Finances Projections). The Greek PM is implicitly backing my analysis: Papandreou Urges EU Emergency Plan After German Officials Suggest IMF Aid

March 18 (Bloomberg) -- Greek Prime Minister George
Papandreou
set a one-week deadline for the European Union to craft a
financial aid mechanism for Greece, challenging Germany to give up its
doubts about a rescue package.

Papandreou said he may turn to the International
Monetary Fund to overcome the debt crisis unless leaders agree to set up
a lending facility at a summit March 25-26. The IMF option has already
been dismissed by European Central Bank President Jean-
Claude Trichet
and French President Nicolas
Sarkozy
, who say it would show the EU can’t solve its own crises.

He's throwing the gauntlet down, and the gauntlet is made
out of US forged IMF metal. Greece is willing to diss the EU in order to
offer an ultimatum. Whose going to be the first to flinch?

“It’s an opportunity to make a decision next week
at the summit,” Papandreou told reporters in Brussels today. “This is an
opportunity we should not miss. When you have that instrument in place,
that could be enough to tell the markets hands off, no speculation, let
this country do what it’s doing.”

After reviewing your austerity plan, it appears that you
are doing more speculation than the market!

Greece pinned its hopes on the Brussels summit as
German officials voiced qualms about an EU-led rescue, potentially
backtracking on a commitment hammered out by finance ministers just
three days ago. Greek bonds and the euro fell.

Greece, which was brought to a standstill on March
11 by the second general strike this year, needs to raise about 10
billion euros ($14 billion) to refinance bonds that come due on April 20
and May 19. Papandreou said current markets rates are unsustainable.

Brinkmanship

The yield on Greece’s 10-year government bond rose
12 basis points to 6.21 percent. The euro fell for a second day against
the dollar, slipping as much as 0.7 percent to $1.3648. Credit- default
swaps on Greek sovereign debt rose 7 basis points to 295, the highest in
a week, according to CMA DataVision prices.

“There’s a good deal of brinkmanship involved to
get the EU and euro group members to come up with a more concrete plan,”
said Klaus
Baader
, co-chief European economist at Societe Generale in London.
“It’s also directed at capital Markets, to reassure markets that Greece
is not about to go into default.”

German Chancellor Angela
Merkel
yesterday ruled out “overly hasty” aid pledges, shifting the
pressure back to Greece to fix Europe’s biggest budget deficit. Signs
of a split in the German government emerged after Finance Minister Wolfgang
Schaeuble
endorsed the use of European channels at an EU meeting on
March 15.

...

The risk
premium
on Greek 10-year bonds has more than doubled since the
beginning of November on concern about the country’s ability to bring
down last year’s deficit of gross domestic product, the largest in the
euro’s 11-year history.

Papandreou’s government has passed three packages
of deficit reduction measures this year to try to convince the EU and
investors it is serious about bringing the deficit down
to 8.7 percent of GDP.

I doubt this!

Soaring Greek borrowing costs threaten to erode the
fiscal gains made from forcing the country to make sacrifices including
wage and benefit cuts for public workers, Papandreou said.

“We are under a basically IMF program, whether it’s
called that or not,” he told a European Parliament committee earlier.
“We don’t have on the other hand facilities that the IMF would give. We
don’t want to be in a situation where we have the worst of the IMF if
you like and none of the advantages of the euro.”

Valid and honest point! For those of you who don't
subscribe, read up on my take on the Pan-European Sovereign Debt Crisis:

  1. The
    Coming Pan-European Sovereign Debt Crisis
    - introduces the crisis
    and identified it as a pan-European problem, not a localized one.
  2. What
    Country is Next in the Coming Pan-European Sovereign Debt Crisis?
    -
    illustrates the potential for the domino effect
  3. The
    Pan-European Sovereign Debt Crisis: If I Were to Short Any Country,
    What Country Would That Be..
    - attempts to illustrate the highly
    interdependent weaknesses in Europe's sovereign nations can effect even
    the perceived "stronger" nations.
  4. The
    Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western
    European Countries
  5. The
    Depression is Already Here for Some Members of Europe, and It Just
    Might Be Contagious!

  6. The
    Beginning of the Endgame is Coming???

  7. I
    Think It's Confirmed, Greece Will Be the First Domino to Fall

  8. Smoking
    Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer
    Beware!
  9. Financial
    Contagion vs. Economic Contagion: Does the Market Underestimate the
    Effects of the Latter?
  10. "Greek
    Crisis Is Over, Region Safe", Prodi Says - I say Liar, Liar, Pants on
    Fire!
  11. Germany
    Finally Comes Out and Says, "We're Not Touching Greece" - Well, Sort
    of...
Last modified on Thursday, 18 March 2010 00:00

7 comments

  • Comment Link Reggie Middleton Friday, 19 March 2010 12:37 posted by Reggie Middleton

    ZH Reader, I believe the country analysis is thorough, but to be honest that is a matter of opinion. The analysis contains the aspects you inquired about.

    Report
  • Comment Link shaunsnoll Friday, 19 March 2010 11:58 posted by shaunsnoll

    worth reading for the counter argument

    http://seekingalpha.com/article/194439-23-reasons-to-be-wildly-optimistic-about-the-economy?source=email

    Report
  • Comment Link shaunsnoll Friday, 19 March 2010 11:38 posted by shaunsnoll

    zerohedgereader,

    the fees may look steep to a retail investor but if you manage anything more than $10k or are interestd in learning, I have a hard time seeing how this site isn't one of the most amazing values for investment research I've ever seen. In 2008 and early 2009 Reggie was putting up stock after stock that went straight to $0. Anyone subscribing would have made many many multiples of their fees off of even one of those investments. If you're worried about the fees you should look at the returns a put option has when a company falls 20% in one day due to some horrific financial surprise. If nothing else though, this site is a fantastic learning tool and easily worth its cost if just for that.

    Report
  • Comment Link ZeroHedgeReader Friday, 19 March 2010 02:31 posted by ZeroHedgeReader

    Reggie,

    How much detail do you delve into for your subscriber analysis on how the European countries are going to fail? Do you analyze the budgets, tax base and spending, trading patterns, major industries, etc?'

    I am seriously considering a subscription, but your fees are really steep. I guess I'm trying to figure out if it's worth the money. I know your analysis of corporations is very good; I have no way of knowing how detailed your analysis of countries are, though.

    Report
  • Comment Link Reggie Middleton Thursday, 18 March 2010 15:50 posted by Reggie Middleton

    and I don't see it happening again in the near future. if it does, be sure to use your stops and hedges.

    [quote]do you think you would ever be able to capitalize on a similar situation in the future whereby stocks rebounded strongly in the face of what you perceived to be atrocious news? also, since it's possible we end up with a japanese scenario of decades long churning up and down but going nowhere, should we not acknowledge that there will be excellent opportunities on the long side in the years ahead even though the economic data may not support it? [/quote]

    I don't mind stocks rebounding strongly. What the problem was was the length, breadth and depth of the rebound. Regardless, I am still up about 250% from the beginning. Thus, fundamamentals still work. I don't believe math will stop being relevant this time around either. Yes, there are opportunities to be had on the long side, and if you trade often that will be a boon. I don't offer trading opinions here though. Remember, I offer only fundamental and macro opinion. I don't want anyone to get the impression that I ever offered trading advice. With that being said, you do see who would have came out on top in the japanese scenario, a bull or a bear! The fundamentals always revert to mean.

    I appreciate your questions, and want to spend more on it but I have to go.

    Report
  • Comment Link Reggie Middleton Thursday, 18 March 2010 15:45 posted by Reggie Middleton

    Good questions. I'll address as much as I can.
    [quote]at what point do you put your thesis to bed or come up with a new one?[/quote]
    The thesis gets put to bed when it is proven wrong. The market has run up dramatically (actually, it was a historical run up) but that does not prove the fundamental thesis wrong. Stock prices and fundamental reality do no always converge. That is how I made the profits in the downfall in the first place. Of course, there is no denying that bull made money, but that doesn't mean the problems are gone. Simply look a the volume, record low volume practically each and every time the market shoots up. I have no problem changing the thesis, but it has to be wrong and that encompasses more than just stock prices moving against it. If you remember, stocks rocketed in favor or tech companies during the .com boom, and did so for more than a year. That ended badly as fundamentals eventually reasserted themselves.

    [quote]i know you've remarked before that you are not a permabear and will change as the winds shift. but a year ago the winds did shift in a big way and the market certainly seems to be shouting louder than ever that you are on the wrong side of the trade.[/quote]

    Again, the fundamentals didn't shift, market prices did. Think in terms of the housing bubble, prices shifted against fundamentals, but that doesn't mean that the fundamentals were wrong. In retrospect, I would have loved to have participated in the run up, leveraged to the hilt, but the math didn't add up, and it still doesn't. The euro area debacle is a prime example. To invest against the math is what I would consider gambling. If you're a nimble trader, than cool. I am not. Look at the market volume and you will see the vast amount of market participants also seem to boycott the "against the math" rally.

    [quote]but let's not ignore stocks like aapl, amzn, intc, csco, f, dal, cal, goog, sbux, wmt, fdo, dltr, mcd, hd, bbby, dri [/quote]
    I'm actually quite bullish on many tech companies and their businesses, but I don't trust the market that has run against the fundamentals and unfortunately, those stocks trade on that market. Again, I would have loved to participated in the gamble and have one, but I adhere to fundamentals over the long term. 2009 has been a very bad year, but if you add up all of the losses and the gains, the strict fundamental guys have trounced those chasing momentum, or at least I have. Hey, I was very bullish on real estate until things got carried away. I was able to see it. This equity market got very carried away, very fast and very far. If I am wrong, I will be the first to admit it just as I was first to admit a bad 3 quarters in 2009. I just ask that things are kept in perspective. Very few people made a lot of money in the 2009 rally because it was hard to justify, particularly if you add the 07 and08 losses to the 09 gains.

    [quote]all things considered, they have done rather well. their share prices are being driven higher and their investors rewarded[/quote].

    But it was mostly not investors that were buying them, it was churning traders and algos. Those investors that actually held on have not really profited much. Most actually lost some, some may be slightly positive.

    [quote]and the positive results are not confined to a particular niche. rather, they are occurring across a broad array of the economy.
    the issues you rail against--the dirty balance sheets of the banks, misuse of leverage, cre, foreclosures and distressed loans from the looming mortgage resets, sovereign nation default-- are not unknown to the market. even still, it pushes ever higher. [/quote]

    I agree, but math is still math. 2 + 2 must equal 4 in order for me to go long with conviction. Even if I was wrong, the market has shot up so far, so fast that I would be right again. I would love to go long for it takes less work than to go short, but the fundamentals need to be there. If I am wrong, then this is the first time that I know of that the market just shot up without the money (or even the volume) to support it. Notice how I was NOT wrong about revenues and earnings. The only variable was share prices. This, combined with the fact that nearly everything that caused the crisis is still in place, should give one pause. We shall see. As I have told subscribers in the past, one can purchase SPX/Y indices, futures and options to hedge and ride the market up if one doesn't want to sit on the sidelines. Just remember, real estate values are going down while credit is getting tighter, unemployment is rising and people are spending less yet real estate companies are increasing by 60% should scream to the prudent speculator that something is amiss.

    [quote]very simply the zirp and debt monetization were mighty forces. to stand against them was unwise. when money costs nothing it will be put to work. [/quote]

    I disagree here. if there was so much money being put to work in the market, it would show up in stock volumes. volume has been at record LOWS. This smacks more of clandestine manipulation than actual liquidity being put to work. Liquidity would portend the stock are actually liquid. Several times, bailed out, formerly and probably still insolvent Citigroup was nearly the majority of market volume for the day. Now, what does that tell you?

    [quote]for no sensible person would allow an opportunity like this 2009 bull run to pass him by a second time even if it were to end up collapsing back to the 2008 lows at some point in the future.[/quote]

    i agree, but if you are using math and dig into companies, you would not have seen such a run. This run was unprecedented and unsubstantiated. As proof, remember the green shoot theories propagated by the sell side throughout ALL of 2009? Well, [u][b]each and every single one of them hae been proven dead wrong[/b][/u] after the market has run up. With the benefit of hindsight, has the market given up any of its wrongfully forecasted gains. Nope. As a matter of fact it is simply grinding higher, looking for more evidence that to date is simply not there. That debunks the market as a discounting mechanism theory, for if it was it would have dropped after the discounted gains failed to materialize.

    [quote]stand firm against a rally of many months and many percentage points highlights a major flaw in fundamental investing in my opinion. namely, it fails to get a short investor out of his chosen stocks when the overall market goes on a buying binge and it fails to get a long investor out of his chosen stocks when the market goes on a selling stampede.[/quote]

    I understand your frustation, but this was a once in a lifetime occurence.



    Report
  • Comment Link chad Thursday, 18 March 2010 15:08 posted by chad

    reggie this is a sincere question and not meant to be snarky. at what point do you put your thesis to bed or come up with a new one? what specific criteria do you need to see before you'd be willing to buy stocks? i know you've remarked before that you are not a permabear and will change as the winds shift. but a year ago the winds did shift in a big way and the market certainly seems to be shouting louder than ever that you are on the wrong side of the trade. stocks across numerous sectors are sitting at or above pre-crisis highs and many are even at all-time highs. i know it's easy to call the rally in the market irrational and bubblicious when things run so dramatically counter to your viewpoint. i find myself falling into that trap and have to remind myself that i'm not being totally objective when i do that because there is always the possibility that i am wrong. but let's not ignore stocks like aapl, amzn, intc, csco, f, dal, cal, goog, sbux, wmt, fdo, dltr, mcd, hd, bbby, dri .... these are just a few off the top of my head.
    the fact is that there are a slew of companies across a wide swath of industries from tech to airlines, from resource to retail that have weathered the storm and whose businesses have not been severely damaged by the banking and real estate implosion. all things considered, they have done rather well. their share prices are being driven higher and their investors rewarded. granted, their valuations at these heights may be too rich, but the general sense from the market is one of great relief that a large number of businesses managed to escape the debacle with revenues and profits still intact. and the positive results are not confined to a particular niche. rather, they are occurring across a broad array of the economy.
    the issues you rail against--the dirty balance sheets of the banks, misuse of leverage, cre, foreclosures and distressed loans from the looming mortgage resets, sovereign nation default-- are not unknown to the market. even still, it pushes ever higher.
    again, i'm not calling you out and not trying to throw anything in your face. i will concede that i have been absolutely wrong about these markets. and i have been punished for it. i presumed the rally would be nothing more than a bounce. but to call what has taken place over the past 12 months a "bounce" would be inaccurate. it was a phenomenon in and of itself, a year of unabated buying. very simply the zirp and debt monetization were mighty forces. to stand against them was unwise. when money costs nothing it will be put to work.
    so my purpose in the post is not to hear you say you were wrong and it's not to criticize. ultimately you may be proven correct with your troubled stocks. my purpose is to find out what you have learned from this past year, for no sensible person would allow an opportunity like this 2009 bull run to pass him by a second time even if it were to end up collapsing back to the 2008 lows at some point in the future. but to sit back and watch or, even worse, stand firm against a rally of many months and many percentage points highlights a major flaw in fundamental investing in my opinion. namely, it fails to get a short investor out of his chosen stocks when the overall market goes on a buying binge and it fails to get a long investor out of his chosen stocks when the market goes on a selling stampede. do you think you would ever be able to capitalize on a similar situation in the future whereby stocks rebounded strongly in the face of what you perceived to be atrocious news? also, since it's possible we end up with a japanese scenario of decades long churning up and down but going nowhere, should we not acknowledge that there will be excellent opportunities on the long side in the years ahead even though the economic data may not support it?
    i wish you good luck.

    Report
Login to post comments