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Game Plan for a Grexit

Tuesday, June 16, 2015
Money and Markets
You can also access this issue on our website.
How to "Game Plan" for a Grexit in Your Portfolio
Market Roundup
Dow +113.31 to 17,904.48
S&P +11.86 to 2,096.29
NASDAQ +25.58 to 5,055.55
10-YR Yield -0.04 to 2.318%
Gold -$4.50 to $1,181.30
Oil +$0.49 to $60.01

  By Mike Larson

European markets are signaling today that the end of the line really may be here.

Bond yields jumped in peripheral European countries like Spain and Portugal … Germany’s benchmark Dax Index fell to its lowest since February… and a key volatility/fear index for European stocks surged to a six-month high.

So what should you do as an investor? How can you game plan for a “Grexit” – Greece defaulting on its debt payments, and subsequently being pushed out of the euro currency union? It depends on which of the following possible scenarios plays out:

Scenario 1: A quick and painful, but ultimately healthy move - Let’s say Thursday’s meeting in Europe comes and goes with no deal. Greece sticks to its guns, and so do European creditors. Multiple reports suggest that would be followed by capital controls being slapped on Greek banks over the weekend, and an emergency summit of European leaders designed to contain the damage and ease the transition of Greece to a new currency system.

Things would probably get very ugly when global markets open Sunday evening. The selling would likely spread from European to U.S. stocks, as well as higher-risk bonds around the world. The euro would get hit hard, and the dollar would jump.

But after the initial shock, investors start to say, “You know what? We’ve been dealing with this Greek garbage for five years. Thank God it’s over!” They decide Greece is a unique case, and that other PIIGS countries are still well on their way to recovery.

That brings bargain-hunters out of the woodwork, and the global markets zoom right back higher again. The euro actually rallies sharply from its lows, as investors conclude the currency union is stronger without Greece weighing it down.

The glaring exception to the rebound scenario is Greece. It suffers from an even-deeper recession, and losses in both stocks and bonds, as international investors and banks shun the country for years.

The clock is ticking for a Greek deal.

Scenario 2: Another last-minute can-kick - Greek leaders stare into the abyss at the end of the week and realize they don’t like what they see. They come crawling back to Brussels, begging for forgiveness and agreeing to European demands.

This would almost certainly spark a sharp market rally, and a big surge in the euro currency. But since it would just paper over Greece’s problems (again), that rally probably wouldn’t stick. We settle back into the trading range we’ve been stuck in for months.

Scenario 3: A long, drawn-out disaster scenario - Greece goes over the edge, and rather than breathe a sigh of relief, investors panic. They decide Greece really is a precursor to similar problems in the other PIIGS countries, and they start dumping all European bonds and stocks.

That selling spreads to Asian and American markets, causing the tentative breakdowns in select sectors to spread to the broader averages. Forget Dow 18,000. We see 17,000, 16,000, or even 15,000 in short order, and the late, great bull market that began in 2009 ends with a bang.

“Invest in sectors that have little exposure to Greek contagion.”

So what’s the most likely? I’m leaning toward scenario 1, with a slightly smaller expectation of scenario 2. Scenario 3 looks like an outlier, but I can’t rule it out either.

My strategy therefore goes something like this:

BulletContinue to invest in stocks and sectors that have very little exposure to Greek contagion. I’m thinking health care and consumer non-durable names here.

BulletBalance that out with stocks and ETFs that are so beaten down already, that they’re irresistibly cheap. Those are the kinds of names that are unlikely to get hammered yet again from unrelated Greek turmoil. Put energy and select emerging markets away from Europe in this pile.

BulletRemember that capital fleeing weak European stocks or bonds has to go somewhere. That money will naturally flow to stronger regions of the world that offer “safe haven” status. This could actually benefit highly rated, fundamentally healthy U.S. stocks. So while I’ve taken some profits recently in my Safe Money newsletter, I haven’t sold everything and ran for the hills.

Lastly, I plan to remain extremely vigilant to the possibility of the third scenario. I will keep a close eye on my indicators here, follow all the developments overseas, and call “audibles” or otherwise revise my game plan as necessary.

So what do you think of the game plan? Does it make sense to you? Any additional moves you’d make other than those I’ve highlighted here? Hit up the website to let me know.

Our Readers Speak

The spotlight remains firmly focused on Greece, and for good reason. The end game looks like it’s finally here. So what should, or will happen? Several commentators weighed in on that in the past 24 hours.

Reader Bob J. noted the futility of the approach Greece’s creditors keep pushing for the country, saying: “Too much debt and too little growth are the cause of the problem. But you can’t solve the debt problems by more austerity. Until the European countries recognize that, there can be no solution. More austerity always causes more debt.”

Reader Steve R. said Greece might seek financial salvation elsewhere if it can’t obtain it from its current creditors. His take: “I firmly believe that the Greek prime minister is off to Russia and will strike a deal for Putin to advance them some money (which he doesn’t have either). His trip is no coincidence!

“That will scare the EU, Germany, France and the U.S. to death, and they will craft a solution so that they can avert the Russian advance into Western Europe!”

Reader Donald L. said there’s plenty of historical precedent for what Greece is going through, offering this view: “Most Latin American countries have defaulted at one time or another and the sky did not fall. Although that should have been a warning to Greece’s creditors, they seemed oblivious to the possibility and went on lending them money.

“The only answer now is to financially quarantine Greece and hope the contagion does not spread. As far as the money; it’s gone, just like the WWI loans we made to Europe.”

And Reader Nick pointed out that Greece is playing a very dangerous game by holding out for a better deal. His take:

“The Greeks think that Europe is bluffing and are holding out for a better deal. But the Europeans are not bluffing because if they gave in, they would have to offer better deals to all the Club Med countries. This would become a transfer union which the German taxpayers are totally unwilling to underwrite.

“Ultimately, the Greeks still see themselves as Greeks and the Germans still see themselves as Germans. As long as those nationalistic associations remain stronger than feelings of association to Europe, then a political and economic union just will not work.”

Thanks for sharing your thoughts. Here’s the website link again if you want to add more to the discussion as the clock ticks down to zero hour.

Other Developments of the Day

BulletWill the trade legislation that failed on Friday be resurrected in another format? President Obama and Republican allies of convenience are hoping so. They continue to explore various procedures to get around opposition within the Democratic ranks in Congress.

BulletHousing starts plunged 11.1% to a seasonally adjusted annual rate of 1.04 million in May, missing the average forecast of 1.09 million. But when you consider that April starts jumped more than 22%, the number doesn’t look as bad.

Building permit issuance also jumped 11.8% to 1.28 million, easily topping the 1.1 million estimate. That’s an indicator of future activity as builders don’t pull permits unless they plan to start construction later.

BulletAnother U.S. airstrike has taken out a key terrorist leader, this time the head of al Qaeda in the Arabian Peninsula (AQAP). Nasser al-Wuhayshi was taken out in Yemen, according to media reports. He had a $10 million bounty on his head, underscoring his significance to U.S. anti-terrorism personnel.

BulletIt’s hurricane season … and the U.S. just experienced its first landfall. Tropical Storm Bill came ashore in southeastern Texas today, packing winds of 60 miles per hour. That’s not much in the grand scheme of things. But Bill is dumping lots of rain on a region that suffered serious flooding only a few weeks ago.

As always, I’d love to hear from you on these stories over at the website here. So fire away!

Until next time,

Mike Larson

(P.S. Don’t miss Dr. Martin Weiss’ first video in the series “The Ultimate Wealth-Building Strategy for Uncertain Times” that was released Monday at 2 PM Eastern Time! Click here to view his important briefing now.)


Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
The investment strategy and opinions expressed in this article are those of the author's and do not necessarily reflect those of any other editor at Weiss Research or the company as a whole.

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