Monday, November 29, 1999

ANALYSIS - Not all U.S. investors seduced by euro zone rescue

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One week ago, Greek stocks and bonds were on top of many U.S. money managers' list of the most undesirable securities.Today, enough investors took a fresh look to put cash to work and sent Greek, and global stocks, surging higher on the back of a $1 trillion emergency rescue package to stabilize the euro as the Greek debt crisis spread.It isn't a sea change. Some money managers remain sceptical about Greece, and the euro zone, pulling out of its downward spiral.The change of heart -- at least for the short-term -- stems from the $1 trillion package consisting of 440 billion euros in guarantees from euro area states, plus 60 billion euros in a European stabilization fund. The fund could be disbursed to help euro zone states if needed on strict austerity conditions.EU finance ministers said the IMF would contribute up to 250 billion euros for a total of 750 billion, about $1 trillion.Additionally, the European Central Bank said it will counter "severe tensions" in "certain" markets by purchasing government and private debt."Europe right now is a buying opportunity," said David Kovacs, chief investment officer at Turner Investment Partners, which oversees more than $20 billion.After last week's stock market swoon where the Dow Jones industrial average fell nearly 1,000 points in a matter of minutes only to rebound nearly as quickly, the early Monday morning rescue package helped soothe investor anxiety.Prior to that, the fund flow data for the week ended May 5 from EPFR Global showed investors pulled a net $2 billion out of European equity funds, the most in a year on fears the Greek debt crisis was spreading.But in response to Monday's moves by the ECB and EU, Greece's benchmark general stocks index rose 9.13 percent while MSCI's all-country world equity index rose 4.77 percent.The pan-European FTSEurofirst 300 leapt 6.4 percent, and the U.S. benchmark S&P 500 stock index gained 4.4 percent.Greek 2-year notes have traded on Tradeweb from under 2 percent in December to 21.5 percent last week, to 7.78 percent on Monday.Kovacs said Portugal, Italy, Ireland, Greece and Spain "got oversold" and his firm has begun bottom fishing for bargains, in both stocks and bonds."There is an artificial bottom to this debt," he said, noting that with Greek debt yields at 8 percent they represent a buy because of the backing by the EU.NO DICEThe massive liquidity shock to the European system is akin to what the United States administered at the height of the financial crisis.The combination of last week's U.S. sell-off and Europe's weekend rescue created buying opportunities, but outside of Europe, one prominent investor said."I've avoided Europe and continue to do so. I think no matter what they do it is going to be slow growth in Europe. There are lingering problems and there is going to have to be fiscal consolidation (there)," said Martin Sass, founder of investment advisory firm MD Sass with $7 billion in assets under management.Sass said he used the panic sell-off last week to pick up U.S. shares he follows, including adding to his position in MetLife Inc , which closed up 8.35 percent on Monday, after a combined drop of 7.2 percent last Thursday and Friday."We've got this good news because it gave a liquidity injection to the patient and so it feels a little better but the problems linger on in all these so-called PIIGS countries," Sass said.One option trader is sitting on a potential $1.3 million profit after buying 20,000 call options on Spain's stock market, using the EWP exchange-traded fund that tracks the performance via the MSCI Spain index."The bet came ahead of the weekend when a European solution was expected to be announced, and although many were skeptical, this trader made a massive bet that the European markets would rally," said Joe Kunkle, a founder of Web information site OptionsHawk.com.AUDACIOUS BUT IS IT ENOUGHThe $1 trillion price tag on this rescue certainly got the market's attention but concerns for the future remain.Those include the austerity measures Greece must now enforce which could have a negative impact on Europe's stronger economies, in particular Germany which may find its exports a harder sell within the EU."The rescue package that the EU and the IMF have put together is audacious," said Tad Rivelle, chief investment officer at TCW in Los Angeles."Over the longer-term, the EU will have to be able to demonstrate that it can effectively impose fiscal discipline on its members before we can say definitively that the model for the euro is a durable one," said Rivelle.The euro on Monday rose as much as 3 percent against the U.S. dollar before succumbing to a sell-off that wiped out the day's move to leave it at $1.2777 . At the end of 2009, the euro traded at $1.4316.One hedge fund manager, who spoke on condition of anonymity, believes the euro is still overvalued and thinks the rescue package does nothing but delay the inevitable."They have to devalue it just as several of the countries in Europe have to default," the manager said."Greece is past the tipping point. There is no scenario now that you can think of where they can pay off their debt. So what are you doing by delaying it? Make it worse."(Additional reporting by Doris Frankel in Chicago; Editing by Andrew Hay)(For more business news on Reuters Money visit http://www.reutersmoney.in)
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