Archive for Paul Bodner

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5 best stocks for a long term portfolio strategy

Picking stocks to buy and hold requires investors to identify companies with great long-term fundamentals that still offer value.  Timing the stock to buy it at a good entry point in its cycle or fairly priced versus its growth potential are both keys.  The stocks listed here all fit that profile for investors.

Qualcomm (QCOM)

Qualcomm is a great way for investors to play the ongoing growth of mobile technology around the world.  The company manufacturers and licenses technology used in mobile devices.  It has content in almost every 3G and 4G device sold.  The increasing use of smartphones and tablets will continue to generate revenues for Qualcomm well into the future.  Smartphone adoption in the developing world will continue to expand and drive long-term revenue growth at the firm.  A forecast from Strategy Analytics forecasts smart phone sales of 320 million units in 2014 and 350 million in 2015.  Qualcomm has a market share of 59% in the chipsets of smart phones.  It is more ideal than companies like Apple (AAPL), Google (GOOG), or Samsung in our view, because it benefits no matter which company wins in smart phones.

Qualcomm has as strong cash position with around $15 per share in excess cash and continues to generate significant FCF.  It trades at a discount to big tech peers at 15.6x TTM earnings and 12.7x FY16 EPS.


Lowe’s (LOW)

The housing sector and DIY business continues to slowly improve in the U.S., and housing starts have not rebounded to even normalized levels.  With an outlook for sustained long-term improvement in housing, home centers also benefit.  In addition, the retail sectors as whole is also improving behind U.S. economic growth and increasing consumer spending.  Multiples tend to expand in that environment, and the share price of Lowes should benefit from all these trends.

Lowes also has room to expand margins whereas most retailer are currently trying to defend them.  The online push from Amazon (AMZN) is impacting many retailers.  However, consumers still shop and buy DIY, hardware, and other core products for Lowes in physical stores.  The company is also in the midst of a value improvement initiative that could further help margins.

Internal initiatives at Lowes, its defensible position in retail, and trends in the U.S. economy are all positive.  It is a good fit for investors to buy and hold long-term in this environment.

LOW (CRM) is the clear leader in its sector in both innovation and market share.  Forecasts are for its revenues to continue to grow at 30% per year for the next few years.  Gains in its cloud-based products will drive its growth and could generate additional share gains.   In addition, it should continue to consolidate its space and make further acquisitions.

The ability of to continue achieving growth rates of ~30% per year despite its size is impressive.  It is the leading SaaS company and is gaining share in enterprise applications.  Its large client base in its platform also presents the opportunity to upgrade customers to higher margin products as they grow.  As continues to grow over the long-term and beat revenue and cash flow forecasts, the stock price should follow suit.


Twitter (TWTR)

Social media is here to stay so holding one of the key players for the long-term makes sense.  While Facebook (FB) is currently king and making money, threats to its status as king in the long-term do exist.  It has uncertainty around growth in its user base and the level of user engagement.

On the other hand, Twitter is increasing the number of active accounts with 284 million users on the service currently.  Revenues are doubling every year, and it should start to generate profits.  With strong relationships with advertisers and users, Twitter is here to stay.  The stock is trading at $37.57, well below its high of close to $70.  The valuation is more reasonable at this entry point.


Caterpillar (CAT)

Caterpillar shares had a difficult 2014, rising to $110 in July before a big pullback to its current share price of $83.97.  A slowdown in the global economy, especially the developing world and in Europe, has weighed heavily on the shares.  The economic outlook negatively impacted both its construction equipment business along with an already softening mining equipment segment.

However, Europe will rebound and the developing world will again start to grow.  Both construction activity and raw material consumption will rise as a results which both drive CAT’s business.

Owning CAT in a long-term portfolio provides exposure to global economic growth.  It is the best-in-class operator and also has a current dividend yield of 3.3%.  The stock trades at 12.4x FY15 EPS, on the low end of its historic range.  Earnings should resume growth in 2016, and the share price should follow.


Housing Outlook is Mixed, Investors Should Look for Indirect Exposure

Housing Outlook is Mixed, Investors Should Look for Indirect Exposure

The U.S. housing market periodically shows signs of life, but with each resurgence in optimism follows a period of disappointment as expectations rise too quickly.  Housing starts remain below normalized levels based on historic data, and the timing of a recovery is uncertain despite improvements across other sectors in the U.S. economy.  While the housing market is slowly improving, the outlook and pace of a recovery remains uncertain.  Investors looking for housing should look to stocks with indirect exposure due to the risks that remain.

December Results were Mixed

Data released on January 21, 2015 indicated that new starts were up 4.4% in December, a positive swing at year-end.  Single-family homes, which had previously lagged apartments, were up 4.5% in the month, the largest increase since September 2012.  However the results were mixed.  Permits, an indication of future activity, were down 1.9%.


Low interest rates, favorable government policies, interest from overseas buyers, and affordable prices should have all come together to make the housing market one of the first to recover.  However, housing starts are lackluster.  In the chart, note that while starts are on an upward trend, they are still at historic trough levels when looking at the data back to 1959.

The market should be stronger by just looking at mortgage rates.  Rates have continue to decline over the past year, especially on 30-year fixed rate mortgages (FRM).  Thirty-year FRMs are down to 3.66% from just under 4.5% in January 2014 (see following chart).  The problem is not the price of money, but the unwillingness of banks to soften the lending standards to those without the most perfect credits.


Tight Mortgage Policies at Banks

Lending policies remain tight at banks, and they are still selective on mortgage lending.  The large penalties most banks had to pay after the crisis has caused increased caution in loan standards.  This continues to weigh on the resale market and on new starts.

Tight credit is a big problem for the housing market. Unless the buyer has outstanding credit, finding a loan is difficult.  This is despite low interest rates, and banks looking to invest their money.  Many banks are increasing loans in other parts of the business that have less regulatory risk.  Currently, the new regulations require that if a bank errors in a loan it underwrites, it must repurchase those loans.

Fannie & Freddie Relax Standards

The Obama Administration is implementing new policies to try and loosen up the mortgage market.  Fannie Mae and Freddie Mac recently adjusted lending standards for packages of mortgages they back.  The new policy allows for down payment requirements as low as 3%.   Also, to address the threat banks could face from having to repurchase loans, Fannie and Freddie have more clearly laid out what issues would trigger an event.

The FHA also took action and cut the annual mortgage-insurance premium to 50 bp to 0.85%.  HAMP was also extended beyond 2015 as the current backlog to extend repayment terms is still over 200,000.

While these actions are somewhat marginal, the government lacks significant levers to pull.  Interest rates are already low and concerns remain in the market from the housing bubble.  That said, these actions and a rebounding economy could be enough in 2015 to act as the catalyst for a more robust recovery in housing.  Some markets are showing positive signs on the margins.

Marginal Data from Redfin is Positive

Data from Redfin, a real-estate broker, indicates that 35% of homeowners are renting out homes prior to selling versus 39% in 2013.  This shows increasing confidence in current prices.   Data from the same firm shows that only 11% of homeowners in its market had negative equity in November 2014 compared with 19% in the previous spring.  This increases homeowners’ confidence in the market and increases the likelihood they look to trade-up to pricier homes.

Stock Ideas to Play Housing for 2015

While the timing of a recovery remains uncertain, investors looking to find stocks with housing exposure to benefit from a recovery should look to mortgage writers and related retailers.  A financial like Wells Fargo (NYSE: WFC) or Bank of America (NYSE: BA) will benefit when the number mortgages they underwrite starts to increase.  Home improvement centers like Home Depot (NYSE: HD) and Lowes (NYSE: LOW) should also benefit from an improving housing market and a stronger retail outlook for 2015.    Even Target (NYSE: TGT) benefits when housing improves, since people that move purchase new home related products.  Homebuilders are a more direct way to gain exposure to the market.  Each one has a certain profile, so investors should dive into this a little deeper to understand geographic and segment exposure.

The Outlook Remains Uncertain

Analysts have a wide range of views on housing recovery for 2015.  While some expect double-digit increases, the more common view is for growth in the single-digits with some room for an upside surprise.  Investors should continue to closely watch the data as an economic barometer, but also to time entry into housing related equities.  Investors with a longer investment horizon, can look to invest in housing related stocks that should increase in value when the recovery does finally occur.

The European Central Bank in Frankfurt

ECB Announces Welcomed Stimulus Plan, However the Outlook Remains Uncertain

The European Central Bank (ECB) announced a €1 trillion stimulus plan this week designed to combat deflationary pressures in the Eurozone.   Stagflation and deflation have emerged as the latest threat to economic recovery in Europe and around the world.  In December, consumer prices actually fell by 0.2% across the Eurozone.

U.S. and stock markets around the globe reacted positively on Thursday to the news.  U.S. stocks have rallied all week based on the expected stimulus along with better than expected earning announcements.   Markets expected a move from the ECB, but the size and scope was a positive surprise.  The door was also left open for additional actions that could spur investment to ignite growth in a very stagnant Europe.

Details of the €1 trillion stimulus

The ECB will purchase €1 trillion ($1.57 billion) worth of debt from the public and private sector through September 2016 as part of its quantitative easing policy (QE).  It will purchase €60 billion in assets per month from member governments and private sector companies in them.  It will start to make purchases in March 2015.  The door was left open to extend the stimulus plan beyond September 2016 if inflation does not hit levels close to the annual stated target of 2%.  The ECB expects its balance sheet to reach the highest levels since 2012.

Mario Draghi, ECB President, also stated that the Eurozone central banks will share the risks from debt purchased from EU institutions, but the central banks will not bear risks from losses associated with the purchase of government bonds.  As part of the stimulus package, interest rates on four year loans were also cut by 10 basis points.  The other benchmark rates remained at record lows with the overnight rate actually negative.  Member institutions would have to pay to store money at the ECB overnight.

The policies are all designed to push money into the economy through increased lending and investment.  The effect here is twofold.  First, by increasing the money supply in the market, it should help maintain current price levels and drive them closer to the 2% targeted inflation rate.  The forces of supply and demand act here.  In addition, low interest rates and increases in the money supply also are meant to encourage lending and investment.  Increased investment from governments, businesses and consumers should increase the number of jobs in the market and along with spending activity.  This acts as a stimulus to the flattish growth situations in most of Europe’s economies.

What to do with Greece?

There was no guidance in the announcement on the ECB’s plans for Greece, and how it would deal with a political shift there.  There is increasing pressure in Greece for it to abandon the required austerity measures imposed by the ECB.  An upcoming election and political pressure could result in Greece abandoning certain polices it had to adopt.  I would also likely want to resume deficit spending.  In order to do this, Greece needs either the ECB to buy its junk rated debt, or it would have to pull out of the Eurozone and find buyers for its debt elsewhere.   If measures are relaxed by the ECB for Greece, it could impact decisions by governments in the rest of Southern Europe and also in France.

Similar approached used in the ROW post-economic crisis

The move is welcomed by markets since it adopts an approach used by the U.S., Japan, and the U.K. following the financial crisis.  So far, the ECB has attempted to use low or even negative interest rates to encourage lending and stimulate growth.  This has not worked and most of Europe’s economies have struggled to find consistent growth.  Many on the Street hope this change in approach is also a sign the ECB is focused on more than just maintaining its targeted inflation rate, and it will continue to adopt pro-growth policies.

On the other hand, this may not provide enough boost to stagnant economies like France and Spain and the more troubled ones like Greece and Portugal.  These countries may need more targeted measures, but their monetary and fiscal policy options are limited by ECB rules.


Currency markets in flux

All this action has impacted exchanges rates.  The Euro has declined versus the dollar behind European troubles in recent months and even more so since the market started toEuro expect a QE policy change.  Along these lines, the cheaper Euro will help make Europe’s exports cheaper abroad.   It could also spark other governments outside the Eurozone to take action. The Swiss changed their fixed exchange rate last week which sent turmoil through currency markets.  Japan is Germany’s biggest competitor in the export of automobiles, and its central bank could take action to improve the attractiveness of their exports.  In addition, the USD has risen compared to currencies around the world and at some point that will impact U.S. economic growth.  If the dollar’s value continues to increase, the Fed will eventually have to start looking into policy changes.


The ECB stimulus action is welcomed by investors around the world.  It could act as a catalyst for growth in the region.  That said, a recovery is still anything but certain in Europe, and the global economy remains fragile.  Outside the U.S., the situations remain risky.  If international markets do not improve, how long can the U.S. remain an island of stability?


Two Stock Ideas in an Attractive Retail Sector for 2015

The U.S. economy is one of the lone bright spots in the increasingly muted global outlook.  In addition, the job market continues to improve which should start to stimulate wage growth.  The U.S. consumer has continued to increase spending since late 2009, and this trend could further accelerate.


There is uncertainty in many sectors in the stock market due to many stocks broader global exposure and other industry specific issues.  Many stocks in the specialty retailer sector lack exposure to broader global economic movements and are more U.S. centric.  The improving economy and relative safety they can provide puts the sector on the overweight list for 2015.

Two stocks within the space that can benefit from the macro trends and also continue to grow through expanding market share and innovation are Michael Kors (KORS) and Restoration Hardware (RH).

Michael Kors

The Michael Kors brand is one of the fastest growing accessible luxury brands in the North America.  It is well positioned, has an increasing market share, and can continue to expand in North America and internationally.  The stock pulled back in the second half of 2014, and its valuation versus historic levels and peers is attractive.

Same store sale growth at Michael Kors is industry leading.  The brand should benefit from both an improving economy and rising market share.  Piper Jaffray conducted a propriety survey prior to the holiday season of consumer’s wish lists.  Michael Kors was the top ranked fashion brand on the list.  The brand is emerging as the leading U.S. luxury brand and should continue to gain market share.  In addition, the survey from Piper also could indicate strong holiday sales numbers when KORS reports earnings.

The international market for Michael Kors has outperformed initial expectations from management and the Street.  This is an emerging driver for the stock.  Along these lines, the company could double the number of Michael Kors stores to 700 over the long-term.

Margins at the brand are also best-in-class.  It uses fewer promotions and maintains stickier pricing. Management continues to highlight its focus on margins and maintaining price integrity at all points in the economic cycle.   Margins should continue to lead the industry and could expand further behind increasing sales volumes.

Current analyst consensus forecast is for sales growth of 33.5% and 20% in FY15 and FY16 (March year end, respectively.  Current EPS is for earnings of $4.18 and $4.85, respectively, this year and in FY16.

Michael Kors trades at the bottom of historic range despite ongoing growth outlook


Analysts average target price is $92 for KORS or 19x FY16 EPS compared to its current price of $67.01.  The stock currently trades at 13.8x NTM P/E, at the bottom of its historic range noted in the preceding chart.   Its peer group average is 18.9x EPS, with competitors like Ralph Lauren trading at 18.5x earnings.

Restoration Hardware

Restoration Hardware is an established brand and that continues to increase its presence.  It is one of a few retails stores that continues to expand and achieve success.  Margins, earnings and cash flow continue to accelerate with some analysts expecting earnings to double over the few years.  The stock is at an attractive entry point for a retailer, where it has additional new store growth ahead while also having excellent same store sales growth.  Profitability tends to increase for retailers experiencing this type of growth.

Restoration Hardware has differentiated itself in the space.  The CEO stated in an interview on CNBC, “If you think about the retail stores that have been built over the last 30 to 50 years, most retail stores are archaic windowless boxes that don’t have any sense of humanity.  There are no windows, there’s no fresh air, there’s no natural light.  Plants die in a typical retail store.”  He went on to note that retail stores lack innovation and the innovation is happening online which is why it draws consumer interest.  That ignores the fact that 92% of retail purchases occur in store versus 8% online.  The ability to innovate in that model is attractive.

In addition, the store does have ties into housing since it sells furniture, home accessories, and hardware.  The slowly recovering US housing market could provide an additional boost to earnings (see following chart).

U.S. Housing Starts Continue to Rebound and Remain below Normalized Levels

Housing starts

RH was up over 40% in 2014, and it trades at 30.3x NTM EPS.  That said, the stock has pulled back to $90.80 from its high of ~98.50 in December 2014.  With an attractive growth profile, innovative approach of management, and forecasted EPS growth of 27% in FY16, it is attractive and worth watching.




3 Long-term Value Stocks Created by the 2014 Commodity Selloff

In 2014, commodities and oil & gas sold off, and the related stocks underperformed the market.  A slowing global outlook, largely in Europe and developing economies, and increasing supply in both sectors compounded to cause the selloffs.  Oil prices are just over $50/bbl currently compared to over $100 for most of the past three years, see the following chart.  Long-term we expect the global economy to recover and cause demand to rebound for oil & gas and commodities.  Many industry analyst still expect long-term oil prices of around $80/bbl.


While the timing of a recovery in the global outlook and commodity prices is hard to time, we believe that there are some good long-term value stocks created by the selloff.  We like Phillips 66 and Kinder Morgan in oil & gas.  Forecasts are for both to have strong earnings and dividend growth over the next five years, and they can do so regardless of the price of oil.

For BHP Billiton, it is the best of breed miner, and we see increases in the currently muted outlook for long-term global commodity consumption as the catalyst in 2015.  We expect developing markets and a recovery in Europe would drive its share price higher.

Phillips 66 Long-term Play on U.S. O&G Production Volumes

Long-term, the fundamentals and diversity are attractive at Phillips 66 (NYSE: PSX).  Given near-term uncertainty in oil prices, we view PSX as a smart way to find value in the sector with less exposure to short term oil price changes and drilling volumes.  It will benefit from increasing O&G volumes in the U.S. over the next ten years.  Street expectations are that earnings and dividends will continue to grow, the latter at close to a 20% CAGR through 2018.

Phillips 66’s business model is one of the most diversified among refiners.  Its primary segments are Midstream, Chemicals and Refining & Marketing.  The decline in oil prices over the past quarter has driven PSX and the whole sector down and created a good buying opportunity.

We expect long-term production will continue to increase in the U.S. behind ongoing development of shale projects.  PSX is making further investments in the Midstream business, which transports oil & gas, and will lead to higher earnings and improving cash flows.  Management issued capex guidance of $4.6 billion for 2015 compared to $4 billion in 2014 with investment in Midstream largely responsible for the increase.  In addition, Goldman Sachs forecasts EBITDA in the MLP business will increase from $1.1 to $2.2 billion by 2017 behind growth in transportation, refining logistics and NGL volumes.  While the Chemical segment is marginally impacted by the lower price of crude, it will adjust prices and forecasts are for the business to grow by 30% by 2017.  Combined this will drive the ~20% dividend CAGR, earnings growth and the share price along with those.


Kinder Morgan Provides Good Value for 2015 and Beyond

Kinder Morgan (NYSE: KMP) is another oil & gas stock that we like for both 2015 and longer term.   It should grow dividends in the double-digits for next few years.  It has made some acquisitions in the MLP space that should lower its cost of capital and contribute to its dividend growth.  Its recent merger also provides a $20 billion tax benefit over the next 14 years.  This should improve FCF and fund the 16% dividend increase in 2015 and a 10% increase each year after that.

In addition, management noted that the merger results in a much lower cost of capital through the elimination of Incentive Distribution Rights.  This can drive additional investment and acquisition at a time when there are some cheap assets in the market due to the decline in oil prices.  Additional acquisitions provide upside to current earnings and dividend forecasts.

The stock has a dividend yield of 4.2% currently.  Management commentary and forecasts for dividends are for grow over the next five years.  The stock looks cheap, and we expect shareholders will benefit from a rising share price and dividend this year.

Petrobas (NYSE: PBR) and Gazprom (MCX:  GAZP) are two other oil and gas ideas for those that look to the international markets as well.

BHP Billiton 2014 Selloff is an Opportunity to buy into Long-term Global Growth

BHP Billiton (NYSE: BHP) is the largest producer of resources in world.  It is centered mostly on mining, but also does some oil & gas exploration.  The pullback in demand and prices in the iron ore and copper markets caused the stock to start selling off in early July 2014.  The stock is down over 33% since July 5, 2015.  Two primary changes in the market contributed to the selloff, China’s economy started to stumble, especially the housing sector, and the outlook for global growth continued to soften in Europe and emerging markets.  This led to declines in commodity prices and volumes which cut into BHP’s future earnings outlook.

Long-term, we expect emerging markets and Europe to rebound.  China will continue to grow but may have to weather some additional pains near-term.  Also countries like India will continue to increase commodity consumption.  While prices may not return to prior highs for many commodities, demand will rise and with it production.  For BHP Billiton this will translate to higher production and increasing earnings.  Right now, the sector is out of favor but we expect global growth will improve in 2016.  The share price should improve with the outlook and higher commodity prices.


GDP Eurozone

Can the Euro survive this situation: The Euro, Greece, Germany and the rest of Europe?

Deflation and weak growth combined with another possible crisis in Greece threaten the existence of the Euro.  This time the economies of southern Europe on not teetering on a collapse, an election in Greece is largest threat to the future of the Eurozone.  A win by the opposition party in late January could trigger a series of actions that put Europe in the position of another bailout or kicking Greece out of the Eurozone.

GDP Growth is waning…..again

GDP growth across the Eurozone has rebounded over the past few years, but it still remains relatively weak (see following chart).  In addition, the low bench mark interest rate of 0.05% set by the European Central Bank (ECB) has done little to boost struggling economies in largely in southern Europe.

GDP Eurozone

Among Eurozone economies, only Ireland and Lithuania, a new member in 2015 are forecast to experience high growth rates this year.  The poor performance of the Iberian Peninsula, Italy, and Greece are continuing to drag down the rest of Europe and put mounting pressure on the currency.  The Eurozone is now on the edge of another recession.  Threats from deflationary pressures and other challenges are only adding to the pessimistic outlook for 2015.

Deflationary pressures are now a reality

Deflation is no longer a threat in the Eurozone but a fact.  Official data released this week, indicated inflation was -0.02% in December compared to the prior months levels and far below the ECBs 2% target.

Energy prices were largely to blame for the deflationary pressure, dropping by 6.3% compared with December 2013 prices.  Excluding energy, prices were up 0.6% in month.

Low inflation rates and deflation make debt repayments more challenging for the already debt burdened countries in the Eurozone, especially Greece, Spain, Italy and Portugal.  With low or declining GDP growth and deflation, the tax bases decline and government revenues along with them.  This makes debt repayment more challenging.

Positively, the likelihood of the ECB taking additional stimulus actions has increased as a result of the December data.  Another round of quantitative easing is likely.   However, Germany, the most influential member of the Eurozone, stands in opposition to additional quantitative easing.

Greek Snap Election Presents Additional Problems

The deflationary pressure has only served to increase an already high debt burden for Greece.  The country has an election on January 25th that could cause a change in the countries leadership.  The liberal left Syriza party joined with the far-right Golden Dawn party to block Stavros Dimas Presidency.  The event triggered an early election.

Reportedly, Syriza is leading by 3% in polls and is backed by many citizens that have not seen improvements in the economy in recent years.   Unemployment remains high in Greece and was 25.7% in November.  The compares to 11.5% for the Eurozone as a whole.

The international finance community and Eurozone members are concern because the Syriza party opposes austerity and would seek to renegotiate the bailout of Greece.   As a result, borrowing costs for the country have already increased to over 10% on Wednesday of this week.     A win by Syriza could trigger actions by the ECB and spell further trouble for the Euro.

Key issue remains unsolved

The actual Euro has been the biggest problem in the Eurozone and bears a good portion of the responsibility for the issues that arose since 2008.  A flood of cheap money after the introduction of the Euro led to an acceleration in economic growth in Greece, Spain, Italy and Portugal as well as in Ireland.  Historically, economists and investors believed these economies were mismanaged to varying degrees. The introduction of the Euro led investors to believe that economic discipline and higher economic growth would follow, at least in part due to the requirements made to be part of the Eurozone.

bond Yields

Money started to flow into these countries and drive down borrow costs.  The preceding chart shows the impacts.  However, when risk levels increased in late 2008, the money supply tightened.  Investors realized higher growth rates had a strong relationship to cheap money that stimulated activities like housing construction, and economic prudence was still lacking.  When investors pulled the money out due to economic concerns, yields skyrocketed.

The Euro and single currency is a factor here because the ECB controls the monetary policy behind the Euro.  Governments in the Eurozone could not independently use monetary policy to stimulate the economy, especially with other powerful players in the Eurozone opposing such measures.  The economic climates then got worse instead of better.

The inability of governments to take actions through monetary policy has hindered growth most of Europe and likely extended the crisis. This is an ongoing issue for the Eurozone and one argument to break it up.

Will the Eurozone survive another Greek crisis?

If Syriza wins, Greece will likely decide that it will not maintain austerity and other measures the key Eurozone members’ support, like deregulation of the labor market.  The ECB and other Eurozone players can either decide to continue to support Greece to maintain the Eurozone or kick Greece of the Eurozone.  The latter would likely cause the Greek economy to endure more hardships, and these troubles could spill into the rest of Europe.

However, following the 2008 crisis and the last Greek bailout, the ECB has addressed this murder/suicide, help us or else, approach by Greece.  Measures were taken to make sure banks and other countries could endure a stress such as this through the much talked about stress tests.  The ECB allowed Banco Espiritu Santo to collapse and Cyprus to default on its debt without much of a sound elsewhere.  A Greek default and collapse would surely make some noise, but would cause nowhere near the damage it could have last time around.

On the other hand, it could bailout Greece again.  If the opposition wins, Greece will most likely initiate more deficit spending.  It would finance the deficit by forcing Greek banks to buy its bonds.  These banks would then in turn sell the bonds to the ECB.  The ECB has to buy them to keep the Eurozone alive and the rest of Europe would again bail out Greece and finance its deficit.  While this violates many agreements, it would keep the Eurozone intact. A bailout could signal other nations, including France, to cease spending cuts and supply side reforms since there are no repercussions.

Northern Europe, the most vocal of which is Germany, opposes another bailout. If they do not allow the ECB to take action, Greece would have to exit the Eurozone putting an end or big hole in the long-time dream of one Europe.  Increasingly, Germany is becoming more comfortable with Greece exiting the Eurozone.    The politics are complicated, and the outcome anything but certain.  Changes in Greece would result in Europe weighing a bailout versus an increasingly tighter European Union.

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