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Stay the Heck Away from Greek Stocks

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April 28, 2010 – Comments (23) | RELATED TICKERS: NBG

  I love investing in distressed opportunities as much as the next person, but the thing that scares me about investing in Greece in general and the National Bank of Greece (NBG) in particular is the possibility of a run on the bank.

Many of the huge U.S. banks that either failed or were bought out at fire-sale prices, like Lehman Brothers, Bear Stearns, etc...didn't begin to run into serious problems until people started to lose confidence in them and began to pull their money out in droves.  I realize that this isn't an apples-to-apples comparison because the companies that I mentioned are investment banks rather than regular banks, but the concept remains the same.  If I had an account at a Greek bank, you sure as ship can bet that I would switch it to a non-Greek bank ASAP.  Why wouldn't you?  There's lots of multi-national banks that do business in Greece.

The way I look at Greece is that the country's economy is permanently broken and a default or a major restructuring of its debt is almost inevitable.  Its problems run deep in its society.  A huge chunk of the Greek population works for the government at the same time that corruption, tax evasion, and bribery run rampant crimping government revenues.

Add to this the fact that half the professions in Greece allow employees to retire and start collecting generous pensions in their 50s and that the people there go absolutely wild and threaten to strike if anyone in the government even hints that the retirement age will be pushed back even by only a year or two.

Pensions are a problem everywhere, even here in the U.S., but Greece’s pension spending as a percentage of gross domestic product is already among the highest in the EU and is projected to experience by far the largest increase between now and 2050 of any developed country.

Further adding to the pension problem, Greece is headed for a demographic disaster.  For some reason, Greece has one of the lowest birthrates in the world (someone needs to send them some Barry White CDs and other romantic stuff so that they can get it on more).  The country's population is rapidly aging.  Currently Greece has four workers for every citizen who is 65 and older (and again many Greeks are allowed to retire well before that).  By the year 2050, that figure is on track to drop to only one worker for every sixty-five year-old.

Besides, how can Greece hope to grow its way out of its debt problems when it doesn't have its own currency to devalue and its population will eventually begin to shrink?  If I was a member of the European Union, I would seriously consider finding a way to kick Greece the heck out rather than pouring good money after bad to help them kick the can down the road for another year or two.

Greece's problems are structural, not just a result of the recent economic downturn.
Perhaps Greek stocks like NBG will end up being home run investments and I'm just too conservative an investor to see that.  I certainly wouldn't risk shorting a loaded spring like this even in CAPS (as if I could even find shares to short anyhow).  I have not personally been to Greece and spoken with people there like many of The Motley Fool's official analysts have, but to me this situation is a train-wreck that I plan on avoiding.

Deej

Home Fool

No position in NBG (which is up big today)

23 Comments – Post Your Own

#1) On April 28, 2010 at 11:35 AM, portefeuille (99.60) wrote:

The way I look at Greece is that the country's economy is permanently broken

oh, come on, please ...

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#2) On April 28, 2010 at 11:39 AM, TMFDeej (99.41) wrote:

That's awfully vague, port.  Perhaps you can elaborate about why you think that Greece's structural problems are fixable without a default or major restructuring of its debt.  As I mentioned in my post, I'm far from an expert on the country.  I'd love to hear others' educated opinions on why the Greek situation is fixable.  Perhaps you can convince me to go long a Greek company or two in CAPS (never in real life).

Deej 

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#3) On April 28, 2010 at 11:39 AM, Option1307 (29.68) wrote:

I Agree Greece has many problems that it needs to overcome, and a default/restructure is certainly not out of the question. However, when the "world was ending" and all US banks were insolvent yadda yadda in early 2009, weren't people making them same arguments you are now making about greece? We all know how that turned out.

Im not advocating anyone buy a large position in any Greek stock, nor am I saying NBG is comparable to US banks in 09. All Im saying is that it might be worth a small gamble (and gamble it is) because the world is likely not going to end this time around either.

Happy specualtion Fools!

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#4) On April 28, 2010 at 11:42 AM, Option1307 (29.68) wrote:

For the record, I'd be much more willing (although still not likely) to buy OTE instead of NBG. At least OTE is a relatively stable telecom with a nice dividend that could hold you over until things come down over there.

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#5) On April 28, 2010 at 11:45 AM, portefeuille (99.60) wrote:

this is an arrogant post.

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#6) On April 28, 2010 at 11:49 AM, portefeuille (99.60) wrote:

glad I only read small parts of it. that made me sick already, hehe ...

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#7) On April 28, 2010 at 11:54 AM, TMFDeej (99.41) wrote:

Hmmmm, port.  That's not the sort of intelligent, thoughtful debate that I was hoping for.  I'm surprised.

Deej 

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#8) On April 28, 2010 at 11:56 AM, TMFDeej (99.41) wrote:

BTW, I don't see why it is arrogant to suggest that a country's economy has serious structural problems and that I am going to avoid investing there while adding a disclaimer that I am not an expert on the subject.

Deej 

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#9) On April 28, 2010 at 11:59 AM, catoismymotor (29.49) wrote:

I advise investing in Uzo. Lots of Uzo!

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#10) On April 28, 2010 at 12:02 PM, whereaminow (20.75) wrote:

Deej,

Greece is now more attractive to me than it was last year.  The reason is because last year there was no stopping the unproductive growth of the Greek State.  Now there has to be a forced rollback of the government, possibly even to levels that make investment, savings, and exchange a slight reality (which is better than it was last year, when those things were nonexistent,)

Unfortunately, the Greeks are very Socialist, and most Greeks are slaves financially to the State.  Rolling back will be very painful in the short term.  

David in Qatar

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#11) On April 28, 2010 at 12:03 PM, Option1307 (29.68) wrote:

Port, I too would like to hear some insight on why you think Greece has a sound economy long term. We all learn by sharing our thoughts, right?

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#12) On April 28, 2010 at 12:04 PM, TMFDeej (99.41) wrote:

Thanks for the comment, Option.  You're absolutely right. While I remained invested in equities and I participated in the recent massive rally in the markets I definitely would have had significantly better real world returns if I had purchased "junkier" stocks.  I know a lot of people who made out like bandits by doing so.  I played and continue to play the rebound very conservatively.

Even if Greece does end up having serious long-term problems, there is a very real chance that it will have a huge bounce in the short-term that I will miss out on by avoiding investing there.

This is the sort of intelligent discussion that belongs here in CAPS.  Hopefully we all can help each other gain a better understanding of the Greek situation.

I'd love to hear others' thoughts on why investing in Greek companies like NBG right now is a good idea.  It is very possible that I'm missing something.

Deej

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#13) On April 28, 2010 at 12:08 PM, JakilaTheHun (99.93) wrote:

Deej,

As much as I enjoy your blogs, I admit to being a bit confused, even baffled by your first sentence.  You've never struck me as a high-risk, distressed asset type of person.  You seem to stick mostly to safer investment vehicles from what I can ascertain, and even amongst those, you veer towards areas that are not terribly out-of-favor.  

 

That said, I'd disagree with some of your analysis.  I think NBG is a reasonably good buy.  It's not an excellent buy, and I can find stocks with a better risk-reward balance than it right now, but it's not bad. 

A few things you might be missing:

(1) NBG is a well-run and relatively well-capitalized bank.  If there are bank runs in Greece, it's likely favorable for NBG, which might be the receiptant of some of those withdrawn funds. 

(2) NBG is well-diversified and a good portion of their revenues come from Turkey and parts of SE Europe (other than Greece).  

 

There are a few things I would approach from a different perspective, as well:

(1) You are correct about problems with Greece's public employees demanding too much, including extremely early retirements and inflated wages.  Yet, this is also evidence that Greece can indeed scale back spending when push comes to shove.  

(2) I've never viewed declining population as a "demographic problem".  It makes people wealthier, not poorer.  However, it does have potential to cause deflation and stifle economic growth, particularly in a nation that has no control over monetary policy.  

(3) Even if Greece continues to struggle for another decade, NBG might still be worth more than $3.00 per share.  It's a very well run bank; which contrasts to the very poorly run Greek government. 

 

For me, the biggest risk for NBG aren't bank runs or anything like that.  Rather, I'd see two big risks:

(1) Severe and sustained deflation --- with no control over monetary policy, Greece runs a significant risk of seeing sustained deflation, which will harm all banks that do business there.  

(2) NBG owns a good chuck of Greek government debt.  If Greece were to default, NBG's balance sheet would suffer. 

Still even with those dynamics, there's a good likelihood it's worth more than $3.  The deflation aspect is offset to some extent by NBG's geographic diversification.  

 

I'm not as confident about NBG as I was about REITs last year or small commercial banks over the past six months; I bought in heavily in both of those sectors during a time when fear was at the highest levels imaginable and virtually no one wanted to buy in.  Greek stocks now have similar fears surrounding them, but I'd say that the fears are more justified in this scenario.  But, as often happens in public markets, the fears are also exaggerated. 

However, the big argument in favor of NBG is risk-reward.  In a worst case scenario, you lose 100% if you  buy NBG; but you could potentially gain anywhere from 100% - 400%.  It's not something I'd wager my life savings on, but as a part of a diversified portfolio, it doesn't seem like a bad investment to me. 

I do agree with you about Greece's structural problems, but I also don't see the situation in Greece as being quite as hopeless as it is in many other places around the world.  I also agree that if I were one of the Eurozone's "Northern members" (Germany, France, etc), I would like to find a way to kick Greece out. 

 

As a disclosure, I will say that I went long on NBG yesterday.  

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#14) On April 28, 2010 at 12:14 PM, JakilaTheHun (99.93) wrote:

Also +1 rec.  Even though I disagree with your analysis, I always appreciate your insightful and thoughtful blogs. 

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#15) On April 28, 2010 at 12:23 PM, TMFDeej (99.41) wrote:

Thanks for the rec Jakila.  You make some excellent points about NBG.  The -100% / +400% scenario is attractive.  Perhaps this is another General Growth-esque opportunity.  I'm definitely trying to get a better understanding of the situation.

Let me rephrase my first sentence.  I love it when I feel as though the market perceives a fairly stable situation as risky.  I went hog wild buying high-yielding senior debt during the credit crisis, we're talking about bonds with maturities of less than a decade that were yielding close to double digits.  It was raining the stuff.

What I don't like is situations where I can envision a significant portion of my invested capital being wiped out.  I can see that happening here.

Deej 

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#16) On April 28, 2010 at 12:27 PM, TMFDeej (99.41) wrote:

Here's a link to a short, interesting article on the Greek economy by a Greek law professor at Georgetown:

A Family Portrait of a Greek Tragedy

Deej 

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#17) On April 28, 2010 at 12:29 PM, Option1307 (29.68) wrote:

I can find stocks with a better risk-reward balance than it right now, but it's not bad. 

Care to elaborate on this Jakila?

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#18) On April 28, 2010 at 1:22 PM, JakilaTheHun (99.93) wrote:

You make some excellent points about NBG.  The -100% / +400% scenario is attractive.  Perhaps this is another General Growth-esque opportunity.  I'm definitely trying to get a better understanding of the situation.

Well, I definitely don't view it as a General Growth-esque opportunity.  Honestly, a lot of the REITs were relatively low risk (in spite of the market's irrational fears) and had solid cash flows and good hard assets behind them. REITs are normally considered a safety investment, but perception radically shifted due to the real estate collapse --- which in turn created the opportunity of a lifetime.  

I'd characterize NBG's risks as greater and the rewards as much lesser than General Growth back in April or May of '09.   Not sure if there's a good recent analogy to be honest --- maybe Wells Fargo at the bottom, but I would view Greece's long-term risks as much greater than the US's in early '09.  

 

Here's a link to a short, interesting article on the Greek economy by a Greek law professor at Georgetown

Very interesting article.  There does seem to be that strong familiar presence in economics in much of Southern Europe, but I hadn't ever thought of that as it relates to the Greek crisis.  Unfortunately for Greece, I'm not sure that there's an easy solution to that. 

While we certainly had a healthier culture from the get-go here in the US, there are benefits we have that have deterred similar things happening here.  The US is such a massive nation and the ability to travel and trade freely within its borders creates opportunities that most Europeans simply do not have access to.

Free travel and trade over this massive territory has limited 'familial economics' to a great extent, but it does persist in some places in America, all the same.  One of the reasons I left my hometown, in Northeast Tennessee, was because everything operated on the "Good Ole' Boy" network and if you weren't related to someone, or close friends with higher-level people, your opportunities are more limited. 

The EU is a positive development, in a way, since it has helped erode Europe's hard-drawn national boundaries.  I think most Europeans realize there are significant advantages to the European Union, even if it's an extremely imperfect institution --- which is why Germany might be willing to help out Greece, in spite of the fact that it clearly would prefer not to.  Germany wants something bigger and that dream might fail if Greece fails. 

 

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#19) On April 28, 2010 at 1:32 PM, JakilaTheHun (99.93) wrote:

In fact,  my investing thesis on Europe right now could be summed up as follows:

(1) The debt crises will create a lot of risk that will scare capital away.  However, these crises will also create significant opportunities.

(2) The debt situations will force many of the fiscally reckless nations to re-examine their own ideologies and create more sustainable economic systems. 

(3) The EU is an extremely flawed institution, but most Europeans realize that it is to their benefit to ensure its survival, all the same.  Free trade and travel create enormous benefits and the EU can be an important vehicles towards promoting that.  

(4) Europe is actually in better shape to face most of the challenges of the 21st Century than the rest of the world.  Infrastructure is well-developed, transportation is much cleaner than the US, and there has been a more consistent focus on climate change and sustainable energy in Europe.  

 

The major challenges of Europe seem relatively minor compared to the major challenges of other parts of the world.  Europe needs more sustainable fiscal policies, a more liberal economic system, and improvements in the design of the EU and Eurozone's workings.

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#20) On April 28, 2010 at 6:13 PM, DarkReaper (39.04) wrote:

+! for the cool graphic

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#21) On April 29, 2010 at 12:56 AM, paperpump (96.64) wrote:

Jakila,

while I very much appreciate the intelligent and very enlightening discussion you bring, I very much disagree with investing in Europe. I am one who believes in incentives, and the incentives are not for the weaker nations to produce more and consume less. The growing deficits and continued bailouts will cause larger taxes on business.

Also, how is population growth good? less people working means less incomes which means less people to pay for oversized pensions, more debt, more inflation, etc etc. While Greece may not be able to debase their currency, the whole of Europe can, and will to support the weaker ones- they will take from the most productive and give to the least productive.

Here is something I just wrote about shorting the Euro. (i must say a weaker euro for exporting companies will be cancelled out by higher tax rates). European countries have already tried "tax harmonization" in the face of rising taxes, but soon companies will simply move to areas with lower taxes. In the US i believe this will happen as well- to states in the midwest with lower debt.

anyways, here is the snippit on why I feel compelled to short the EURO.

 

I feel that the case to be made for shorting the Euro is a strong one, and that in the next 5 years there is a great chance for the whole EU to come tumbling down. Some factors at play.

1. Contagion all over the EU (one mentioned portugal, but Irelands debt to GDP is higher than portugals, with a couple banks already majority owned by the gov. There is also spain and italy.

2. the population in Europe is on the decline, (italy's is 1.2%- no country has overcome population growth that low- Mark Stein)

 3. Global interest rates will rise, along with yields required on new issues, which will put more strain on Europe's growing debt level, as global bond competition and a glut of supply weigh on bond prices.

4. Low savings rates mean low investment, which means lower growth.

5. Europe, like the United States has been living beyond its means, and living standards as well as wages will fall.

I have just listed some economical arguments for why Europe as a whole might start to falter. Now I will discuss the social aspects. In the coming year, (as has already been evidenced by Angela Merkel), the stronger European nations will grow tired of subsidizing the weaker nations- ex. Germany and Greece. Going back to the old ways separate nations and currencies would have benefits not only for Germany, but for Greece as well. The situation with the EU and its shared currency can be compared to a school classroom. But in this example, instead of everyone receiving their own grades, the grades are all averaged into one classroom grade. Therefore, the better students subsidize the grades of the weaker students (like germany subsidizes greece through a stronger currency). The weaker students can get into better schools (or consumer more as in Greece's case because of a stronger currency), while the better students get into worse schools than they deserve (In Germany's case they consume less in real terms, because their currency is not as strong as it would be if it were not sharing a currency with a weaker nation). However, the true issue, and the problem that is could cause a large potential sovereign default, is the dilution of the feedback mechanism that Greece should be receiving from the rest of the world to consume less and produce more. In the example of the classroom, the weaker students, because they are getting into a better school, don't work as hard as they should, and continue to do poorly. By subsidizing Greece through bailouts and high interest rate loans, the rest of Europe is taking money from those who are the most productive and best proven to utilize those assets effectively, and giving them to the least productive- those who have proven they are bad investments and poor managers. The main idea the EU was founded on was less currency fluctuation to enable more vibrant trade, not on the socialization of loss, slow growth and inequitable consumption. 

 

All that being said, I think that there are some greek plays worth looking at. I don't like the banks. CCH is on my watchlist in the coming weeks as the crisis worsens the stock could see a pullback and a nice time to pull the trigger. I also speculate that Coca Cola is also looking to consolidate its supply chain as seen with the buyout of CCE.

 

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#22) On April 29, 2010 at 1:02 AM, TMFUltraLong (99.95) wrote:

I wouldn't touch anything related to a financial in Europe with a ten foot pole right now. Will Greece's 2 year bonds hit 50% is the real question...lol

UltraLong

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#23) On April 29, 2010 at 1:13 AM, paperpump (96.64) wrote:

Also, how is population growth good?

2nd paragraph 1st sentance- i meant to ask how population DECLINE is good.

 

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