Next Tuesday’s vote on austerity and asset sales looms for the Greek parliament and financial markets more broadly.
The EU, ECB and the IMF are telling the Greeks that further self-imposed hardship is far better for them than the catastrophe that would follow any type of default.
But you have to admire the Greeks; they have so far played a weak hand better than the Irish or the Portuguese who are not, for now anyway, in the same dire straits. Large numbers of Greeks are not convinced that the prescribed medicine is really good for them. Certainly a default would create severe economic pain within Greece, but it would also inflict more than just a little discomfort on the richer members of the EU.
Picture the Greek population poised to throw themselves off the cliff to economic oblivion (meaning reject any further cuts and just admit they can’t pay back what they owe) while the EU gravely warns them not to jump. And between the two lies a rope linking their fortunes. To be sure, Greece’s default-induced recession will surpass the problems inflicted on German and French banks from losses on their Greek bonds. But it will hurt everybody, and the current medicine on offer fails to acknowledge the parties’ shared fate.
So it’ll come down to whether the Greek government, with its diminishing majority of only 4, ignores popular opinion and chooses to appease the EU so saving its people from an immediate sharp recession, or not. Many countries seem to recover from default well enough – Iceland, Argentina, Russia. And frankly, even if the plan passes there’s little reason to believe it will be successfully implemented. Previous tax revenue targets have already been missed.
But we appear to be headed down an impossibly blind alley, from which we’ll only exit once the rest of the EU acknowledges the need not just for more loans but for debt forgiveness. It looks as if this will only happen when the EU, standing on the cliff and tethered to the crazy Greeks, start to feel the ground slipping away as the profligate borrower steps off the cliff. At that point the German and French governments will acknowledge that their banks lent rather too much money, and will inject their own taxpayers’ funds in to help spread the pain. Greece’s problem is their problem too. Until that point the Euro remains at severe risk; afterwards the prospects for equity markets should be much more constructive. We remain short Euros modestly offsetting losses on long equity risk.
Lower oil prices should be good for retail stocks, and the sector is performing better than most. However, Family Dollar (FDO) is surprisingly weak and in our view represents attractive value at current levels. Its customer base of low income consumers will benefit more than most from lower gas prices, and it continues to have plenty of opportunity to improve its margins to more closely match its competitors Dollar General (DG) and Dollar Tree (DLTR). Nelson Peltz offered $55-60 for the company earlier this year, which management rejected. Possible margin expansion, increased discretionary income amongst its customers and a possible takeover bid next year when its poison pill expires are all supportive.
Disclosure: Author is long EUO, FDO
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