The Greece bull market journal

[Ghost of Cutten]

Can you share your specific long position? (eg. long GREK?)

I'm not sure if you've seen this
(http://globaleconomicanalysis.blogspot.com.au/2014/01/greece-needs-another-bailout-before-may.html) but my uneducated guess is that financial markets have not yet started to price in further Greece default concerns described in that article.

I've never found that focusing on short-term analysis works for calling long-term secular bull or bear markets. In my experience, what matters once the low is clearly in, is focusing on the likely scenarios for 3-5 years in the future for corporate earnings, interest rates, and currency valuations. It is pretty clear from the data that the corporate and macro fundamentals in Greece are getting less bad with each year, as happened with Ireland and Iceland, or Brazil and Argentina a decade ago, or SE Asia from 1999/2000 onwards. At some point they will not be 'getting less bad', they will be good and improving further.

Also, it is important to consider valuations. In his book "Fundamental Analysis", Jack Schwager lists several typical blunders that fundamental analysts commit. One of the classic ones is to allow bearish or bullish factors to influence your view, without relating it to the valuation. The valuation of Greek assets is currently very cheap. Bearish news is not bearish when values are very cheap - the valuation is already pricing in plenty of negative factors. To seriously drive prices lower in a permanent sense, it has to be very very bearish news.

I've said before that market sentiment and a bit of headline news can easily cause a hefty correction in a long-term bull market. This has happened in every recovery bull market after a major economic crash. To profit from those bull markets you need to hold on for their duration - this requires holding on during corrections and negative news headlines. That is why it is not easy to profit from bull markets, if you follow the news closely and react to every negative thing that comes out.

 

[Ghost of Cutten]

Hmm. So, I bought a hundred NBG in Dec, having seen that it was actually upgraded by Moody's. It's an option, or maybe a lottery ticket. Seeing red on that tiny investment now. Should I scale in in your opinion?

In my opinion, a single stock is far far more risky than the stock market as a whole, which is in turn riskier than a mix of stocks, bonds, and real estate. And a single stock, unless you have some major analytical edge, is not sure to offer any superior return. Therefore unless you really feel you have a big advantage in analysing NBG and its prospects, you are taking on massively more risk for no reason.

Also, a rating change from a rating agency is never by itself a reason to buy or sell a stock IMO.

So personally I just have on a broad market position and will stick with that, and I recommend you do the same.

 

[drownpruf]

I've never found that focusing on short-term analysis works for calling long-term secular bull or bear markets. In my experience, what matters once the low is clearly in, is focusing on the likely scenarios for 3-5 years in the future for corporate earnings, interest rates, and currency valuations. It is pretty clear from the data that the corporate and macro fundamentals in Greece are getting less bad with each year, as happened with Ireland and Iceland, or Brazil and Argentina a decade ago, or SE Asia from 1999/2000 onwards. At some point they will not be 'getting less bad', they will be good and improving further.

Also, it is important to consider valuations. In his book "Fundamental Analysis", Jack Schwager lists several typical blunders that fundamental analysts commit. One of the classic ones is to allow bearish or bullish factors to influence your view, without relating it to the valuation. The valuation of Greek assets is currently very cheap. Bearish news is not bearish when values are very cheap - the valuation is already pricing in plenty of negative factors. To seriously drive prices lower in a permanent sense, it has to be very very bearish news.

I've said before that market sentiment and a bit of headline news can easily cause a hefty correction in a long-term bull market. This has happened in every recovery bull market after a major economic crash. To profit from those bull markets you need to hold on for their duration - this requires holding on during corrections and negative news headlines. That is why it is not easy to profit from bull markets, if you follow the news closely and react to every negative thing that comes out.

Yeah, and the Nikkei looked cheap in 1993... and that was Japan not this Greek joke of an economy.

 

[trefoil]

In my opinion, a single stock is far far more risky than the stock market as a whole, which is in turn riskier than a mix of stocks, bonds, and real estate. And a single stock, unless you have some major analytical edge, is not sure to offer any superior return. Therefore unless you really feel you have a big advantage in analysing NBG and its prospects, you are taking on massively more risk for no reason.

Also, a rating change from a rating agency is never by itself a reason to buy or sell a stock IMO.

So personally I just have on a broad market position and will stick with that, and I recommend you do the same.

Good advice. Thx. Looking at that GREK ETF. Might buy some.

 

[m22au]

In my experience, what matters once the low is clearly in, is focusing on the likely scenarios for 3-5 years in the future for corporate earnings, interest rates, and currency valuations.

It is pretty clear from the data that the corporate and macro fundamentals in Greece are getting less bad with each year ...
At some point they will not be 'getting less bad', they will be good and improving further.

To seriously drive prices lower in a permanent sense, it has to be very very bearish news.

I suppose it all comes down to trade management, and what you mean by "seriously drive prices lower in a permanent sense". The words "seriously" and "permanent sense" are up for interpretation.

Someone could have bought the Athex 20 on 18 October 2012 (day after the start of this thread) at 862.88, and sold at 1,212.60 today for a 40% gain. However I get the feeling that you're looking for a bigger gain than "just" 40%. I could be wrong with this assumption.

I disagree that things are getting "less bad" in Greece. Syriza is doing well in the polls and if Alexis Tsipras is elected he could make the decision to default and/or Grexit. In this scenario, the low of 800 on the Athex may not hold.

I agree with drownpruf who pointed out that the Nikkei may have looked cheap in the early 1990s, and then it declined by a large amount into 2008.

Also as mentioned before, Greece is facing some big maturities in a few months' time that it cannot pay.

In any case, one can get similar European exposure elsewhere (Spain or Italy, or even France) without the additional risk faced in Greece.

 

[Specterx]

Yeah, and the Nikkei looked cheap in 1993... and that was Japan not this Greek joke of an economy.

At the low Greece had fallen over 90% from the highs in just a couple of years; the Nikkei hasn't fallen 90% despite years of falling CPI. It's hard to imagine what wasn't being discounted at the lows short of a meteor strike.

Whether Greece is still cheap after a 250% rise off the low is a different question. Greece is on my radar but at this point, I'd rather wait for a significant decline to get both the secular and cyclical winds at my back.

 

[Specterx]

I disagree that things are getting "less bad" in Greece. Syriza is doing well in the polls and if Alexis Tsipras is elected he could make the decision to default and/or Grexit. In this scenario, the low of 800 on the Athex may not hold.

This seems very unlikely; aside from the fact that all these guys want to remain in good standing with the rest of the European political class, it isn't necessarily good politics as a default or Eurozone exit would invite all sorts of short-term chaos, and tarnish the country permanently.

If Syriza gets elected they would most likely do what Samaris is already doing: leverage the government's improved fiscal situation and the popular backlash against austerity to extract further concessions from Germany, in the form of additional aid, debt writedowns and an end to the constant nagging for reforms. Just the other day Samaris declared that Greece won't accept further supervision or reform demands from the troika, even though they've largely failed to comply with their original commitments.

 

[m22au]

At the low Greece had fallen over 90% from the highs in just a couple of years; the Nikkei hasn't fallen 90% despite years of falling CPI. It's hard to imagine what wasn't being discounted at the lows short of a meteor strike.

Whether Greece is still cheap after a 250% rise off the low is a different question. Greece is on my radar but at this point, I'd rather wait for a significant decline to get both the secular and cyclical winds at my back.

I don't think a Greek default and Grexit were priced in at the lows in 2012. Sure it was a higher possibility then compared to now, but it's likely the stockmarket would have declined further if a default had occurred.

As for the 250% rise off the low that you cite, I assume this is crystal-ball gazing. The rise off the low of 800(ish) is "only" 50% or so.

As a broader comment, even if Greece does not default this year, for how much longer will German politicians and voters tolerate the situation in Greece and other poorly-performing countries?

 

[Ghost of Cutten]

Yeah, and the Nikkei looked cheap in 1993... and that was Japan not this Greek joke of an economy.

Wrong - in 1993 Japanese stocks were still the most expensive market in the world, and in the upper echelons of valuation, as measured by price/earnings, price/book, price/sales etc. See "The Bubble Economy" by Christopher Wood, for example.

By contrast, Greek stocks are amongst the cheapest both relative to other stock markets and to historical valuation norms.

Also, as I already explained in an earlier post, for investment purposes the absolute quality of any asset is almost irrelevant so long as it has some value and will not go bust. What matters for investment purposes is the *future cashflows and asset value* relative to the present price. If the present is shit, but the future is just slightly turd-like...and the present price is pricing in a really deep quagmire of shit - then it is a screaming buy (like the S&P in early 2009). If the present is great - like tech stocks in early 2000, or real estate stocks in 2006, or bank stocks in Q1 2007 - but the future is bad, and the present price is expecting great things - then it is a screaming sell. Note that in both cases the present situation is almost completely irrelevant (and in fact misleading) as a guide for whether to invest.

 

[Ghost of Cutten]

At the low Greece had fallen over 90% from the highs in just a couple of years; the Nikkei hasn't fallen 90% despite years of falling CPI. It's hard to imagine what wasn't being discounted at the lows short of a meteor strike.

Whether Greece is still cheap after a 250% rise off the low is a different question. Greece is on my radar but at this point, I'd rather wait for a significant decline to get both the secular and cyclical winds at my back.

Well cheapness in a fundamental sense is always measured by valuation, and never by momentum or overbought/oversold measures, which are more short/medium-term trading factors. I agree that for a trading timeframe of a few days up to say 6 months, timing and overextension are important. But not for trying to own something during a multi-year recovery and then sell it once the economy is back to normal.

About waiting for a decline - this assumes that a decline will occur. Whether or not it is rational to enter at the current price, or wait for a decline, is a classic recurring trading dilemma and can easily be solved with a bit of logical thinking. Consider the following situation:

Market X is trading at $20. You are 99% confident that in 2 year's time it will be trading at $40. However you are aware that it could potentially fall up to 30% between now and 2 years. Do you buy, or wait for a dip?

The answer is very simple - it depends on how likely the dip is to occur. If the chance of a 30% dip from today's price of $20 is 99%, then it would be moronic not to wait for the dip. If the chance of a 30% dip is 1%, then it would be moronic not to buy. Therefore whether to buy or wait for a dip to buy, depends partly on how likely the dip is to occur.

Also, it depends on the size of the gains versus the size of the drawdown. It makes no sense to wait for a 1% drawdown to pass, if you are risking gains of 1000%. Whereas if the drawdown could be 99% and the gains are only 1%, it would be insane to stay in.

Here we have a further trade-off - standing aside risks missing a 100% gain if wrong (and there is no dip). Getting in at the current price risks a 30% drawdown, and missing an 85% extra profit (40/[20-6=14]=185% gain, vs a mere 100% gain if you buy at 20 and sell at 40]. Assuming you can buy the exact low of the dip.

So, let's say the chance of that 30% dip is 50/50. If you wait for a dip and it doesn't occur, you miss a 100% gain. If you wait for a dip and it happens and you buy the low, you make a 185% gain. So your EV is 92.5% (0% gain half the time, 185% gain half the time). If you just buy now, you make a 100% gain both times. So your EV is 100%. Also, in the 'buy now' case your win rate is 100%, vs 50% for the 'buy the dip' case.

Now, if we add some more realistic assumptions, things get even worse for buying the dip. Firstly, you are almost never going to buy the low of the dip. You will usually buy too early, or too late, and sometimes you will miss the trade, or get stopped out on your dip-buying. On a 30% dip you will be doing well if you manage to buy at down 15% on average. So the gains from dip buying are far less. Secondly, even if you buy the exact low, you don't know in advance it's the low. Generally you will still be taking quite large potential risk. If you buy at 30% lower, your realistic risk is still probably another 10 or 20% fall. Both these things significantly lessen the benefits from attempting to dip-buy.

The key point is that for it to be rational to wait to buy the dip, you must be *very confident* that a dip is going to occur before further gains do. And in that case - why aren't you short? If you aren't short, or close to shorting, then you yourself are saying that the odds of a dip are not that great.

And if a dip is unclear or 50/50 - it can never be rational to 'wait to buy the dip', because you are passing up likely big gains (if the bull market continues uninterrupted), for less likely moderate gains (from buying lower IF a dip occurs). That is going against the odds.

Finally, in a bull market what is the chance of a hefty dip? Well, by definition, it is usually *less* than the chance of an even bigger rise. In a bull market, prices tend to go up more than they tend to go down, and the rallies are bigger than the declines.

So, there is only one situation in a bull market where it is rational to be flat and wait for a dip - and that is those situations where the short-term outlook is so bearish or risky that it is, or almost is, a 'trading short'. For example if the Greek government fell in some corruption scandal, or Turkey invaded some disputed tiny coral reef that Greece claimed, or maybe just the Greek market had gone up 50% in 2 months and was highly overbought, then some bearish catalyst appeared. Yes, in that case I would probably get flat and wait for a dip - because the odds of a dip would be so high that it would make no sense to risk staying long, and in fact it would be worth shorting. At all other times, the fact that you are not shorting, means that on your own assessment you think the market is less likely to dip than it is to go higher.

Short version: don't sell out of longs in a bull market, unless you are thinking of going short.