How to Play Greek Default

I want to start today by revisiting yesterday’s statement that I suspect that [Greek] default won’t be the negative catalyst that investors expect. While I believe that Greek default won’t be a disaster for the long-term, we also mustn’t ignore the inevitable short-term fallout from an event like this.

As we discussed, if (when) Greek defaults, European banks will suffer losses to their capital base. They may have to raise cash with secondary offerings and perhaps sell assets. And U.S. money market funds that own European bank debt will likely have to do some maneuvering, as well.

So as I see it, there is a set up for a big, quick decline on the news that Greece is defaulting. This will be your buying opportunity.

And the thing is, everyone knows it’s coming. I suspect that’s why we haven’t been able to get any kind of bullish continuation in the stock market. Traders are simply waiting for the inevitable sell-off from the inevitable Greek default.

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Traders seem to be saying that the recent revisions to bank earnings have created an attractive entry point. Yesterday, I reported that Citigroup (NYSE:C) lowered 3Q earnings estimates for Goldman Sachs (NYSE:GS) from $2.70 a share to $0.10.

Clearly, the market was expecting a sharp revision. Just look at how Goldman has traded over the last few months.

So, why would Goldman be a buy now?

Well, most analysts cite the weak market and weak investment banking revenues as the reason for Goldman’s weak quarter. If these items improve in the 4th quarter, Goldman could put up some decent earnings numbers.

I can’t help but wonder too if Goldman isn’t set up to profit from Greek default (they don’t call it the vampire squid for nothing). Perhaps a delay of Greek default into the 4th quarter also sets up a windfall for Goldman.

Also note that the market seems to like the news reported yesterday that Bank of America (NYSE:BAC) will lay off 30,000 workers.

I still say BofA is broken and should be avoided.

Italy is reportedly in talks with China to get some loans to help cover the massive amount of debt it has to roll over by the end of the year.

I can hear the doomsayers now: Look out! China is diversifying its foreign currency holdings. It won’t be long before the lira is the new global reserve currency.

But seriously, it seems like a good idea for China to get involved in the whole bailout game. I just wonder if they will get Buffett-like terms for any funds that change hands.

Write me anytime at [email protected]

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