European Banks and Making a Mint in “Crisis Investing”

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.

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.

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