The Greece bull market journal

Discussion in 'Economics' started by Ghost of Cutten, Oct 17, 2012.

  1. My thesis is that the Greek bear market is over, and a new bull market has begun. Evidence:

    1) Price action - the Athens index is up about 60% from the lows, and now up 9% on the year

    2) The lows earlier this year had the hallmarks of a bear market bottom - a huge multi-hear decline of 90% from the 2007 highs, economic and political news extremely negative, sentiment extremely negative

    3) The major factor inhibiting prices was the fear of a Euro exit - but that has now been practically eliminated by the introduction of the ECB backstop. And just as importantly, market prices responded very strongly after this news.

    4) Valuations are still extremely cheap

    I don't see any credible evidence that a bear market is still in progress, or that the market is in a range. So, IMO the odds strongly favour a huge multi-year advance in Greek equities (and risk assets of all kinds - bonds, real estate etc)

    The question now is how to play it. The model for the Greek situation is similar secular collapses to bear market bottoms, such as Brazil 2000-2002, Argentina 1999-2001/2, Russia and Asia in 1997-98, and so on. Once the lows were reached, these markets typically rallied at least 200% from the bottom within a couple of years, and many went on to advance huge amounts e.g. Russia went up 40 fold in a decade, Brazil went up 20-fold in USD terms within 6 years. Granted, they had other economic tailwinds from the BRIC theme, that I don't think Greece will have. So a better comparison might be Asia 1998 (although those bull markets were hit somewhat by the 2000-2002 bear market in the developed world) - markets like Korea and Thailand rallied huge off the lows there.

    Studying these prior examples, the way to play these rallies is fairly simple - get broad-based exposure to the equities, currencies, and sovereign debt of the markets involved. Equities pay the most, but with the most volatility - for example, Brazil stocks had setbacks of up to 1/3 at times. Sovereign debt pays large cashflows and still makes large capital gains, with less volatility but less profit than stocks. And the currency almost always appreciates a lot in these situations. So, my view is that a mix of Greek stocks, Greek sovereign debt, and Euro exposure (i.e. don't hedge the stock/bond investments) is best.

    Further tweaking would be to buy the best-performing stocks during the rally. These are usually i) the ones most beaten down in the bear market, that just avoided bankruptcy (think financials in early 2009 USA) - but they will normally rally hard only for the first year or so, not the longer-term ii) the best of breed stocks (think AAPL, CMG, BIDU etc in late 2008/early 2009), these can be held longer term.

    There are three main things to get right in this situation: i) have on serious size - these are opportunities that occur once or twice every 5 years or so ii) don't sell too soon - riding out the 20-35% corrections pays well over the longer-term iii) get long as soon as you realise the new bull has started - don't wait for pullbacks, because the opportunity cost is making 2, 3, 4+ times your money, and the risk of entering at a short-term peak is losing 20-30% temporarily.

    The risk, if wrong, is that the bear market is not yet over, and Greece goes into some unique kind of death-spiral where the general index falls even more than 90%. In this case, the risk control is pretty simple - sell at new lows, or a sustained break below major support. The lows were around 490 IIRC on the Athens Composite index, and major support is around 580-590. Against today's prices of 850, that is risk of about 30%. The upside, if correct (which I think is about 80-90% probability) is probably at least a triple from here, so the risk/reward is about 10:1 minimum.

    In my opinion, an exposure of 30-50% of assets is justified in such circumstances, risking 10-15% to make 100-150%.

    Any comments?
  2. Daring


    Do you think a Greek rally will still happen if US markets do a significant pullback like some technical traders are forecasting ?

    With that mind, could you please be kind enough to post your US index read for the near future ?

    Thank you for your time.
  3. m22au


    While the ECB backstop reduces the risk of a Grexit, I don't think it has been 'practically eliminated'.

    The Draghi bond-buying programme was created mainly for bigger and more important countries like Spain and Italy. If the negotiations between the Troika and Greece break down, then it is not 100% certain that the OMP programme would be used for a tiny country like Greece.

    At the very least it is likely that Greeks will vote in an anti-bailout anti-Euro party or parties at the next election. While I concede that Greek stocks may rise between now and the next election, it would be foolish to hold those stocks in the weeks / months leading up to Syriza being voted into government.

    Also, Greek bank stocks have not yet been recapitalized to reflect losses taken earlier this year on Greek government bonds. While non-banks may rise, Greek bank stocks face massive dilution as a result of future capital raisings.
  4. Your plan is sound, but not feasible for small investors whose only access to internatuional markets is via IB.

    What's a closely correlated fund/ETF to the greek markets? I'd want to purchase far out call Leaps in staggered buys, sit back and relax.
  5. Daring


    BUMP so OP does not forget :)
  6. The Global X FTSE Greek 20 ETF (GREK) might be a good way to play this for the smaller investor. It's up over 100% since June.
  7. m22au


    Latest Greek poll:

    All three coalition parties trailing SYRIZA, which garnered 23.8 percent, compared to 22.7 for New Democracy. Golden Dawn was third on 9.2, followed by PASOK on 7.2 percent. Democratic Left had 5 percent.

    As Mish wrote recently

    "As happened in Greece (but so far to a much less extreme in Spain), citizens have shifted well away from the center to far left or far right groups."

    I expect this trend to continue.
  8. I don't think the price of Greek assets in 2015 or 2018 will have anything to do with short-term movements in the US markets. So, I would completely ignore the latter for the purposes of this investment.
  9. It's quite possible. However, exactly the same thing happened in previous examples - Brazil and Argentina voted in more left-wing presidents, in the 1930/40s the USA voted FDR into power 4 times and shifted left. Yet stocks performed very well in those circumstances.
    #10     Oct 26, 2012