European Banks and Making a Mint in “Crisis Investing”

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

This past week, global stock markets resumed their bullish run. The Nasdaq was up 2.5%, while the S&P 500 added 2.2%. Overall, the market continues to be choppy, with attention shifting between the U.S. debt-ceiling debates and European bank bailouts. I expect it to continue to do so in the coming weeks, as we now are fully in the dog days of summer.

You have a number of your positions with earnings announcements coming up this week and next week. They include Alliance Resource Partners L.P. (ARLP) and CROCS Inc. (CROX), two big winners in your current portfolio.

The biggest news in your Bull Market Alert portfolio continues to be your positions in two European banks — and that news seems to change by the day.

First, just overnight, Ireland sold a €1.1 billion stake in Bank of Ireland (IRE) to a group of unidentified investors in a deal that will keep the country’s largest bank out of state control. The government had been widely expected to take control of Bank of Ireland, the last domestic lender outside of state ownership, after it agreed to underwrite a rights issue, whose results are due on Tuesday. The confidence shown by private equity investors is a big plus for Bank of Ireland (IRE), and you can expect a big upward move in the stock today. So I am moving IRE back to a BUY.

Second, on Thursday, the European Union approved a bailout (yet another) for Greece, a complicated scheme whose bottom line is a haircut of about 21% for bondholders. That, combined with the National Bank of Greece (NBG) passing the prior week’s stress tests for banks, is very bullish for your position in the bank.

This volatility also does wonders for the value of your long-term option position — the $2.24 January 2012 options in National Bank of Greece (NBG) that I recommended back in April. As a reminder, these options are a bet that NBG’s stock price will soar by January. By way of comparison, if NBG were trading in a “normal” economy, it would be valued at closer to $8 or $10 per share. So there is plenty of upside — and your downside in this stock is waning by the day.

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As I have written before, if these banks survive — and my bet is that if ANY are going to survive in Ireland and Greece, it will be these two — you can make 5x to 10x your money on these picks. I say this out of experience. I made my fastest money EVER in the Russian stock market in October of 1998 — right after the Russian government defaulted on its bonds and one analyst said, “I’d rather eat nuclear waste than invest in Russia.” On cue, I bought shares in a beaten-down Russian telecom stock. My only regret was that I sold the stock when it tripled — about a week later. Had I held on, I’d have made 30x my money over the next two or three years. Such is the potential power of “crisis investing.” The trick is less to buy at the very bottom. It’s more about having the psychological stamina to hold on — and not sell on the way up.

Having spent time in both Ireland and Greece over the past two weeks, the disconnect between the lurid headlines in the media and everyday life is quite striking. That’s not to say that a lot of these bailout efforts are not misdirected. By the standards of any “rational” economic analysis, they are. I don’t think anyone disagrees that if both Ireland and Greece could devalue their own currencies — and that would mean exiting the euro — their economies could recover much faster. And Greece, in particular, needs a serious dose of “welfare reform,” like the United States did in the 1990s. But what most U.S. commentators don’t “get” is that the euro is not an economic project. It’s a political one. That means that the Europeans will fight tooth and nail to keep it around — even if that doesn’t make the best economic sense.

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Now, the road there is both uncertain and bumpy. But these bets on Bank of Ireland (NBG) and National Bank of Greece (NBG) are bets that it will work. But it is a “bet” as much as it is an “investment.” That’s why I have always said that you should view these positions more like options than stocks.

Portfolio Update

ProShares Ultra Silver ETF (AGQ) ended slightly below your purchase price last Monday, after a volatile week. Still firmly above its 50-day moving average, AGQ remains a BUY.
Alliance Resource Partners L.P. (ARLP) recovered 5.19% this past week. The company announces earnings this Wednesday, July 27. Still trading above its 50-day moving average, ARLP is a BUY.
Avago Technologies (AVGO) jumped 4.39%. Citigroup has noted that it expects that Avago can top estimates when it reports Q3 results on Aug. 23 after strong quarterly numbers out of Apple (AAPL) and Qualcomm (QCOM). Citigroup has a $45 target price on the stock — 21.4% above its current price. Trading above its 50-day moving average, AVGO remains a BUY.
CROCS Inc. (CROX) jumped back 6.61% this past week, more than making up for its previous losses. CROX announces earnings on July 27. On average, analysts predict $281.6 million in revenue this quarter — a rise of 23.5% from the year-ago quarter. Analysts’ earnings estimates are $0.43 per share. Up 14.75% over the past month, and trading above its 50-day moving average, CROX remains a BUY.
Hansen Natural Corporation (HANS) rose 2.84% this past week. The company was upgraded by research firm Longbow, prior to the company’s earnings announcement on Aug. 4. Use a recent pullback in an otherwise bullish chart to add to your position. This stock remains a BUY.
Bank of Ireland (IRE) ended the week 6.45% lower, after jumping 14.42% on Thursday, after news of the Greek bailout, and that the interest rate Ireland will have to pay on its debt to the European Union will be reduced substantially. Overnight, Ireland sold a €1.1 billion stake in Bank of Ireland to a group of unidentified investors in a deal that will keep the country’s largest bank out of state control. With all the good news, IRE is back to a BUY.
National Bank of Greece SA (NBG) soared 21.3% this past week, as the European Union agreed to an elaborate bailout plan for Greece. The bottom line of this complex scheme is that investors will take a 21% haircut on Greek bonds, giving the country more breathing room. Recall also that NBG passed the stress test of two weeks ago. Now trading back above its 50-day moving average, NBG is a BUY.
Novo Nordisk A/S (NVO) traded flat this past week, yet again. One of the best defensive sectors in the market in 2010, NVO remains a BUY.
Rayonier Inc. (RYN) rose 1.11% this past week, still off its recent record highs. This pullback continues to be a good time to add to your position. RYN remains a BUY.
Toyota Motor Corp. (TM) ended the week 1.38% higher. Toyota said its domestic and overseas production levels should return to near pre-earthquake levels in July and reach full production later this year. It also plans to build an extra 350,000 vehicles from October through March 2012 to make up for production lost to the disaster and its aftereffects. With the stock now in a firm uptrend, and above its 50-day moving average, Toyota is a BUY.

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