Tuesday, June 30th, 2014
Tuesday is the deadline for the debt-financing agreement with Greece. There has been a lot of talk and worry about this and as I said a few years ago when this was a problem, Greece is a country that is not even the size of New Jersey.
The concern is that this will be a contagion across Europe and other countries will fall as well. Since the beginning, I said that would not happen and it has not. The concern is now it will happen July 1.
I believe Greece will default on the debt, but I'm not concerned about it. Am I just being foolish or don't understand what is going on? I don't believe that is the case. My opinion is when it defaults, the markets will decline on the short term.
But longer term, investors will realize this was a one-time incident and by Greece defaulting on the debt and pulling away from the euro zone, this is the best thing for everyone.
First, let's understand the effects of the default from the creditors. They will lose the interest that was supposed to be paid along with the principal, both of which will not be paid at all.
Defaulting on debt it is not a good thing, but it happened in the United States to many banks that could not collect on mortgages that people took out. Many homeowners who owed a large amount on their mortgage simply walked away, leaving the bank with a large debt that was not collectible.
The initial reaction was devastating and caused a financial calamity in our banking system. Banks lost billions of dollars and their values went through the floor.
Now, five or six years later, our banks are stronger than ever. The banks took these large write-offs and had losses for a couple of years with no income. They weathered the storm and have done much better.
I believe the same thing will happen with the European countries. The initial default on the debt will be painful, but five years from now the European Union will be stronger. Essentially, the European countries are getting rid of their weak asset and will focus on the stronger assets to rebuild their balance sheets.
I never liked the idea of the European Union because each country has its own government, which has its own agenda, and there is no central government to turn to — unlike the United States, where we have one federal government that controls the entire country.
Unfortunately for the United States, this will affect company profits somewhat as the euro will probably decline and the dollar will continue to strengthen. This will make European products cheaper for American consumers who are buying Porsches, Mercedes-Benzes and French wine.
However, it will make our products more expensive and, therefore, hurt our gross domestic product. But all this will not cause a major problem for the valuation of companies and any pullback in the market I will use as a buying opportunity.
Just to give you some insight in my portfolio, we are sitting on about 20 to 25 percent in cash or about $35 million waiting for at least a 5 percent to 8 percent pullback. I would be extremely happy if that would happen because we could pick up a couple of companies at better prices than today.
And, as always, I know we will not buy at the absolute bottom, but I will be thinking where these companies will be 18 to 24 months from now.
Lastly, you may be wondering how this will affect Greece and the Greek people. Initially, it will be difficult for the Greeks, as the country could return to its old currency, the drachma. Initially, the currency would be very weak; however, everything in Greece will be on sale and I believe tourism will increase dramatically.
This will get Greece back on its feet, I would guess, within a couple of years. Then the currency will rise in value and the economy will get back to normal.
So, as always, don't panic through the downturn. Look at the fundamentally strong businesses that you — I hope — hold in your portfolio and you will weather the storm and come out far better on the other side.
Do you have a question or a company you'd like me to take a look at? Email me at Brent@WilseyAssetManagement.com!
Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.
Sign up for our free weekly e-newsletter for economic updates, investment advice, and various company analyses. Articles are written by well renowned investment expert Brent Wilsey. Please visit our Archived Newsletters tab to view past articles.
Would you like the Smart Investing E-Newsletter sent to your inbox every Tuesday?