A Greek Tragedy Worth Pursuing?

Montreal, Canada

Does it pay to buy when there's "Blood in the Streets?"

In retrospect I should have aggressively accumulated U.S. large-cap bank stocks in March 2009. At that point, banking stocks had already crashed more than 80% from their all-time high. Some sort of dead-cat bounce was imminent. But at that time I truly believed the U.S. banking system was bust –and I still think that's the case today with most banks, especially mid and small-cap banks.

If you're more comfortable buying into a rising trend than stick to what works best for you. I've always preferred distress. I admit I was too bearish 12 months ago and should have accumulated more equities. Instead, I purchased corporate bonds, convertible bonds and avoided common stocks. I was also shorting the market because I didn't think governments would be successful averting a collapse.

History, however, has a way of repeating itself. That's the case right now as it pertains to Greek banking shares after one heck of a collapse since the beginning of 2010. Greece is now in the eye of the sovereign credit storm with short and long-term Greek government bond yields surging over the last several weeks hitting fresh crises highs since Monday. Bank stocks along with the rest of the bourse in Athens have tanked.

Benchmark two-year Greek government bond soared to more than 26% at one point in Europe yesterday before settling at 17.3%. Rating agencies also downgraded Greek debt to junk this week with Spain and Portugal downgraded yesterday. Alas, the once mighty EUR is now in the gutter, erasing all of its gains against the dollar over the last three years. Gold hit fresh all-time highs in EUR last night while also in record territory in sterling terms.

Europe now has its own version of the subprime story – Greece and the other PIIGS, Portugal, Ireland, Italy, Greece and Spain. The Germans, to their chagrin, will have to fork over billions of EUR to save the common currency while at the same time fighting a deflationary menace because of severe austerity measures imposed on the big spenders like Greece and, eventually, Spain and Portugal. Ireland has already dramatically cut spending but is now staring into the dark eyes of deflation.

At some point, probably after German state elections on May 9th, the Europeans along with the International Monetary Fund (IMF) will finally come to Greece's rescue. With Greek bank stocks pulverized over the last few months this might be a good time for a short-term punt.

National Bank of Greece ADR (NYSE-NBG) now trades more than 60% off its all-time high in December 2007. The ADR, however, hit rock bottom in February 2003 at $2.11. We might take-out that level in this panic – currently 55% from this morning's opening ask. National Bank of Greece trades at 6.2 times trailing earnings (if you believe the accounting) and has nixed the dividend.

It's hard to say when Greek stocks will rebound. Yet it's inevitable they will because short of leaving the euro-zone, the Germans really have no choice but to bail-out Greece and support the EUR – now entering the clutches of deflation.

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