Has Greece turned the corner?

Europe has been calm of late.  Former Italian prime minister Silvio Berlusconi is facing house arrest, and it barely makes the news.  A year ago, this would have caused a run on the euro and roiled the world’s capital markets.

And Greece, the country that first comes to mind when the words “Europe” and “crisis” are used in the same sentence, has been relatively quiet as well.

Actually, I should rephrase that.  Greece is far from quiet.  In fact, even doctors have taken to the streets in protest over…well…who cares, really.  The fact is that the capital markets have stopped reacting to news out of Greece.  Greek bond yields have bounced around in a fairly tight range all year and have actually been falling for the past two months…in spite of the global Fed tapering scare. There is a tacit understanding that Germany will continue to keep the Greek government afloat indefinitely, so long as Greece continues to at least make a credible effort at reform and austerity.

It’s not too terribly surprising that Greece will need more bailout funds this year and next.  But what is surprising is that Greece is slowly clawing its way out of perma-crisis.  Greece may actually post a primary budget surplus (i.e. a budget surplus excluding interest payments on existing debt) this year.  In fact, through the first seven months of the year, Greece reported a primary surplus of €2.6 billion.

Yes, you read that correctly, and no, it wasn’t a sarcastic joke.  Greece’s condition is actually improving.  The country still depends on its bailout lifeline for the fragile stability it has at the moment; any attempt to go directly to the capital markets would plunge the country back into crisis and probably default and ejection from the Eurozone.  And its economy is still contracting; GDP shrank by 4.6% last quarter.  More than a quarter of Greek are unemployed (see chart), and wages are falling.

Still, the GDP contraction is the slowest in two years, and we should remember that employment is a lagging indicator.  It’s not unusual to see unemployment remain high in the early stages of recover.

Is it time to consider Greek stocks?  Fellow “Best Stocks of 2013” contestant Meb Faber certainly thought so when he recommended the Global X Funds Greece ETF (GREK) back in January.  Meb was a little early on the call (which is a common curse on value investments), but he correctly noted that Greece had the cheapest stock market in the world.

Almost exactly two years ago, I mentioned three Greek stocks I would consider buying once the dust had settled after a sovereign debt default and possible ejection from the Eurozone.  Well, the default never happened.  But are the stocks a buy?

I’ll start with the Coca-Cola Hellenic Bottling Company (CCH).  Despite its name, this is not really a Greek stock.  It is based in Switzerland, has operations in 28 countries and serves 581 million people, primarily in Eastern and Southeastern Europe. Though listed on the Athens Stock Exchange, it also trades on the London Stock Exchange and on the NYSE as an ADR.

None of this is lost on the stock price.  For a nominally-Greek stock, Coca-Cola HBC is not cheap. It trades for 1.25 sales—only slightly cheaper than Coca-Cola Enterprises (CCE), the Coke bottler for most of Western Europe.  It’s price / earnings ratio—at 52.7—is overstated due to earnings being depressed.  But suffice it to say, this stock is not a screaming bargain by any stretch.

Hellenic Telecommunications Organization SA (HLTOY), as Greece’s leading phone, internet, and mobile provider, is a much purer play on Greece.  Its stock has also had an impressive run, up over 500% since bottoming last summer.

Yet despite the run-up, shares are not expensive, trading at 12 times depressed earnings and 0.85 times sales.  If you’re bullish on Greece, this is probably the safest way to play a rebound, though I should emphasize that Greece is still a very risky market.

And finally, we get to the National Bank of Greece (NBG), the third stock I said that I would consider two years ago.  Be careful with this one.  If Greece were to leave the euro or outright default on its debts—which, though not likely at this point, cannot be ruled out—this stock will be worthless.  If you buy this, you are making a bet that Greece stays in the Eurozone and continues to service its debts indefinitely.  Still, trading at 4 times earnings and only a few dollars away from its all-time lows hit earlier this summer, it might be worth a speculative bet.

This article first appeared on InvestorPlace.

Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, he had no positions in any security mentioned. Click here to learn about his top 5 global investing trends and get your copy of “The Top 5 Million Dollar Trends of 2013.”

The Cyprus Crisis and What It Means For Investors

I’ll give the European Union credit: at least they are creative at finding new ways to upset the world’s capital markets.

Instead of demanding just the usual austerity measures of higher taxes and lower spending—and a potential haircut on speculative creditors such as hedge funds—the EU bailout negotiators insisted over the weekend on extracting a pound of flesh from the customers of Cypriot banks.  Savers would see as much as 10% of their checking and savings accounts expropriated to help cover the cost of the bailout, and the levy would apply even to accounts insured by the Cypriot equivalent of the FDIC.


Needless to say, the news didn’t go over well in Cyprus; it led to a small-scale bank run as depositors rushed to get to their cash.  It also didn’t go over particularly well in Russia.  Cyprus is notorious as a haven for Russian funds of…ahem…questionable origins.  Roughly a quarter of all Cypriot bank deposits are owned by Russians.

As I’m writing this, it looked likely that Cyprus’ parliament would shoot down the bailout agreement hammered out between the government and the European Union on the grounds that it wasn’t fair to small local savers who assumed their deposits were protected by government guarantee. (Imagine any democrat or republican approving something like that here; it would be political suicide.)  The government is also reluctant to “soak the Russians” out of fear that it will destroy confidence so badly as to end Cyprus’ existence as an offshore financial center.  And I can’t say I blame them for not wanting to anger the Russian mafia dons or Russian President Vladimir Putin.  That’s not good for your health.

So what happens now?

Good question. My best guess is that the deal is slightly tweaked to allow the Cypriot government to save face but that the bailout goes through and the depositors get hit.  Politically, German Chancellor Angela Merkel and French President Francois Hollande cannot ask their taxpayers to come to the rescue of dirty Russian money, nor should they.

If the bailout flops, the options quickly get messy.  I don’t see the EU backing down this time and watering down the deal, nor do I see the European Central Bank continuing to provide emergency liquidity.  This means that without the bailout, the Cypriot banking system will collapse, and given that the banking system is eight times larger than the economy, there is no way that Cyprus will be able to make its depositors whole.  Barring some sort of last-minute emergency loan from Russia (which would presumably come with some pretty wicked strings attached), Cyprus either accepts the EU bailout and goes about its business or it drops the euro, issues a new currency, and then falls into hyperinflationary oblivion.

What does this mean for the Eurozone?

The fear was that seizing bank deposits would set a terrible precedent and lead to bank runs in Spain, Italy and other indebted countries and plunge us back into crisis mode.  Once bank depositors are seen as a viable target, you create a slippery slope.

But judging by the market’s reaction, this is a non-event.  European stocks took a small hit on the news, though it caused nothing like the turmoil over Greece, Spain and Italy last year.  Bond yields in these problem countries spiked up but hardly to levels that would cause alarm.

There are a couple reasons why the bank run didn’t happen…or at least hasn’t happened yet.  To start, Spain and Italy already effectively had bank runs last year.  Funds have been leaking out of both since the onset of the crisis, and their respective banking systems have been kept solvent by the ECB.  But more basically, it’s an open secret that Cyprus is a haven for dirty money (wink wink), and investors see clear differences between their own banking systems and that of Cyprus.

There is also the “Draghi Put,” or the belief that ECB President Mario Draghi will live up to his word to do “whatever it takes” to keep the euro intact.  This, more than anything, has been what has stabilized the Eurozone over the past nine months.

And finally, don’t underestimate the effects of “crisis fatigue.”  After three years of crisis, these sorts of headlines simply don’t have the ability to move the market like they used to.

Things could still get very ugly very fast in Europe if the feared contagion finally does happen.  But for now, it looks as though this too shall pass.

Cyprus may choose to leave the Eurozone before this is over or may well become a Russian client state; anything is possible at this point.  But I don’t see any of these outcomes changing the direction of events.  The Eurozone will undergo deeper integration.   With or without Cyprus, the rest of the Eurozone will sink or swim together.

This makes things a little awkward for non-Eurozone EU members like the UK, Sweden and Demark.  But even as the cumbersome, confusing mess it is, the Eurozone will muddle through.

How are we to invest in this environment?  I would recommend using any sell-offs to accumulate shares of some of Europe’s finest companies.  One in particular I like at current prices is Spanish telecom giant Telefonica (NYSE:$TEF).  Telefonica is quietly paying down its debts, and I expect the company to reinstate its dividend within the next 1-2 years.  In the meantime, it’s an excellent way to get exposure to the growing markets of Latin America, where it gets more than half its revenues.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

Disclosures: Sizemore Capital is long TEF.

Ooh la la! The Bullish Case For French Stocks

The country has a socialist president, one of the most overbearing state sectors of any developed country, some of the highest taxes in the world, and its concept of democratic government seems to require frequent rioting in the streets by its citizens.

Vive la France!

France is a country that often seems to prosper in spite of itself, but it is also home to some of the world’s finest companies–including oil major Total (NYSE:$TOT), fashion and luxury goods powerhouse LVMH (Pink:LVMUY) and pharma giant Sanofi (NYSE: $SNY) to name a few.  Think about it.  Only the crème de la crème could survive and thrive in a place as hostile to business as France.

In the Sizemore Investment Letter, Europe has been one of my favorite hunting grounds for my “emerging markets lite” strategy.  Due to the small size of most European domestic markets and due to their old imperial legacies, European firms tend to be more globally focused.  This is an investable theme; one of my best trades in 2012 was in the shares of a French logistics company with a large and growing presence in Africa. (Due to its limited trading volume in the United States, I can’t mention it here.)

I can, however, recommend that investors take a look at the French market as a whole via the iShares  MSCI France ETF (NYSE:$EWQ).

France is cheap right now, for reasons you might expect.  Investors have placed a “Europe discount” on the entire EU as fears linger about its continued viability.  The French ETF trades for just 12 times earnings and yields 3.0% in dividends.

But as the fears of a Eurozone breakup recede with each passing day, I expect investors to warm to French stocks over the course of 2013.

I also like the fact that EWQ is weighted heavily in industrials and consumer cyclicals (17% and 15% of the portfolio, respectively).  This fits a broader theme I’ve been following of allocating to more aggressive sectors (see “Warren Buffett is Rotating into Riskier Sectors”).

Action to take: Buy shares of EWQ at market and plan to hold for 6-12 months.  Use a 15% trailing loss.

Disclosures: Sizemore Capital is long LVMH.   This article first appeared on TraderPlanet.

Charles Sizemore Discusses Germany and the Paul Ryan Nomination on Straight Talk About Money

Listen to Charles Sizemore explain the coming court ruling in Germany that will decide the fate of the Eurozone and the Paul Ryan nomination on Mike Robertson’s Straight Talk About Money.

What Keeps Me Awake at Night

September 12, 2012. This is the date that may ultimately decide the fate of the Eurozone.

It has nothing to do with Greece, Spain, Italy, or any of the other problem children of Europe. No, it is Europe’s stern schoolmistress Germany that holds the fate of the currency zone in the balance.

On September 12, the eight justices of Germany’s constitutional court will meet to decide the legality of the Eurozone’s rescue fund or, more accurately, the legality of Germany’s participation in the bailout fund under the German constitution. Should Germany back out due a court veto, it’s difficult to see the euro surviving the crisis of confidence that would follow.

Americans are no strangers to debates over constitutionality; the 5-4 decision to uphold the ObamaCare legislation was one of the biggest headlines of 2012. But the German debates are a very different animal.

There are two competing clauses in the German constitution. One declares Germany to be “a democratic and federal state” with power determined “through elections and other votes.” This would seem to preclude Germany from granting control of its budget to an EU watchdog or obligating the German state to bail out Eurozone neighbors; the judges have already questioned whether such transfers of sovereignty are permissible.

But then, the German constitution also calls for Germany to strive for a “united Europe,” which would be presumed to include some degree of fiscal union.

In effect, the fate of Europe depends on which clause of the German constitution the justices decide take precedence.

When clients ask me “what keeps you up at night,” this is it. I fear that lack of German commitment could cause the entire European project to unravel.

If the German court finds the bailouts unconstitutional, then Germany would have to amend or even rewrite its constitution in order to participate—which would require a referendum. And how likely does that sound?

Even if a charismatic leader were to convince German voters that constitutional change is the right thing to do, these things take time, and time is a luxury that Europe doesn’t have at the moment.

Now that I have sufficiently scared you, I should point out that I do not see the German constitutional court torpedoing the bailouts.

They know what is at stake, and they don’t want to be responsible for the death of the European project.

I am comfortable being invested in European equities, and Sizemore Capital has an overweight allocation to European equities in its Tactical ETF and Sizemore Investment Letter portfolios.

Still, investors have to consider the “what ifs” when they put capital at risk, and it makes sense to keep a little cash on the sidelines “just in case.” It wouldn’t be the first time that ideology trumped pragmatism in a high-profile court case.

If we get a selloff in the days leading up to the court’s decision, I would view it as a buying opportunity. But, if the German court strikes down the bailout facility or attaches so many conditions as to make it unworkable, I recommend that investors sell all European equities and all but your highest-conviction core American positions as well. Because at that point, the probability of a full-blown meltdown on par with that of 2008 becomes uncomfortably high.

This article originally appeared on MarketWatch.