European Stocks On Verge Of 50%-Off Greek Light Special

Tyler Durden's picture


It seems the clarion call for central bank intervention to save us all is growing louder as following Citigroup's imploring letter earlier in the week, SocGen has done its homework on the impact of a Greek exit from the Euro and finds Euro Stoxx could drop by 50% under a contagion scenario. They believe the reason why the eurozone market is holding up relatively well - despite the rising risk of a Greek exit - is that contagion has not really spread yet, which is then 'discounted' away based on expectations of a central bank put to save the world. In the case of a disorderly break-up (the only kind there can be realistically in our view), they expect eurozone profits to decline for two years, a rise in bond yields (raising cost of funds), a rising equity risk premium, and the implicit drop in P/E multiples. A Greek exit alone (with no contagion) would likely knock 10% off Euro Stoxx but the significant rise in correlations across the euro-zone suggests the idiosyncratic becomes systemic very rapidly.

European market ex-financials has held up relatively well...

but risk of contagion is dramatically high considering the correlation in the euro-zone...


In order to profile the impact of a Greek exit on the DJ Euro Stoxx 50 SocGen imputes:

  • a profits growth decline for two years after restructuring as a result of lower consumption and fiscal tightening in countries remaining in the eurozone,
  • euro depreciation vs the dollar,
  • a rise in bond yields due to risk of default, partly offset by recession fears,
  • a domino effect which is proportional to correlations we showed on the previous page,
  • a rise in the equity risk premium.

Once the potential level of this year?s euro profits is recalculated using our top-down regression model, we input the result into an earnings yield equation to get the DJ Euro Stoxx 50?s sensitivity to both rates and profits. Should profits fall 20%-30% and yields widen 100bp-200bp, we find the DJ Euro Stoxx 50 could lose up to 50% of its value at 23% in the best case and 45% in the worst.

With a 50% drop possible and 10% probable if Greece leaves...


with various scenarios as follows:


Source: SocGen

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Fri, 05/25/2012 - 11:01 | 2462287 Harlequin001
Harlequin001's picture

I think I'll just make it up as I go along...

Think of a number between 1 and 200 trillion. Double it. Multiply it by four. Take away the number you first thought of, and add five...

et voila, a 99.99999999% loss, or thereabouts. Piece of piss.

Now take this piece of paper I've just written, multiply by a reserve ratio of say, the first number you thought of and jackpot, you're well capitalised.

I too could be a central banker, if they could only afford me...

Fri, 05/25/2012 - 11:05 | 2462341 SilverTree
SilverTree's picture

EUR/USD struggling.

DXY going higher.

QEx soon to come.

Fri, 05/25/2012 - 11:12 | 2462375 LowProfile
LowProfile's picture

Get ready for the DXY to go a LOT higher before it goes lower.  FED doesn't have enough political cover to prrrrriiiiiinnnnnttttt yet.

Don't sweat it, embrace it...  PMs will go on sale one last time before QE^10th.

Fri, 05/25/2012 - 11:21 | 2462414 SilverTree
SilverTree's picture



How much cover/pain do you think they will need?

DXY to 90 or maybe >82 for an extended time?



Fri, 05/25/2012 - 11:34 | 2462471 ghostzapper
ghostzapper's picture

Bingo.  Wait and get long Gold again about 1,200ish.  Then the "all in" printfest and Gold eventually does become a bubble a few years later.

Fri, 05/25/2012 - 12:13 | 2462687 Harlequin001
Harlequin001's picture

and this is based on?

Fri, 05/25/2012 - 12:07 | 2462381 The Big Ching-aso
The Big Ching-aso's picture



If the stock market's the pulse of American business this sucker's flat-lining and its butt needs a paddling.

Fri, 05/25/2012 - 11:35 | 2462463 onelight
onelight's picture

No expert here, but part of my work involves guarding again linear thinking, my own in particular. 

Agree the Euro should go to 1.20 per ZH simple comparison of ECB-Fed balance sheets.

And 1.16 looks reasonable, too, prior to a corrective rally.

However, given heavy Euro short positions, I wonder if they don't squeeze back to 1.29-1.32 area, prior to either of those lower targets being met.

The question then being, do that begin that from 1.25, or from 1.24ish...and if so, when? (that would imply 82.5 or 83, DX)

Dunno, just thinking aloud -- Euro should go to parity in the fullness of time, but the tactical

maneuvering capacity of the big movers is something I have learned to (grudgingly) respect.

Fri, 05/25/2012 - 11:38 | 2462491 ReactionToClose...
ReactionToClosedMinds's picture

forgot where I read/saw this .... but last year saw a very well-respected US economist state that the natural US$ value for Euro was $1.18 or so when it was still in high $1.30s+

Was tempted to place my first currency futures trade or find short euroETF ... should have .....


Fri, 05/25/2012 - 11:50 | 2462557 onelight
onelight's picture

It's going around...that was an astute view alright

Trading-hedging is just like that..

As often as not, it's the the province of the 3 bitches, er witches: shoulda, woulda, coulda... :;)

Fri, 05/25/2012 - 21:56 | 2464310 PersonalRespons...
PersonalResponsibility's picture

Feels like shorts are getting out now.

Fri, 05/25/2012 - 10:56 | 2462293 Hopeless for Change
Hopeless for Change's picture

European stocks are being listed on Groupon now.  

"Your daily Athens deal..." 

Fri, 05/25/2012 - 11:02 | 2462329 astoriajoe
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Thanks. That made me laugh in an otherwise crappy day.

Fri, 05/25/2012 - 11:14 | 2462387 The Big Ching-aso
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Europe needs their own version of Facebook or they're doomed.

Fri, 05/25/2012 - 13:40 | 2463057 Zero Govt
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we have it, it's called Skype (much better than Flopbook if you think about it) only problem is global monopolists Microshite bought it and as with everything they touch it's going nowhere fast (see the spiders webs in Windows for further reference)

Fri, 05/25/2012 - 10:57 | 2462296 Shizzmoney
Shizzmoney's picture


Fri, 05/25/2012 - 10:58 | 2462304 slewie the pi-rat
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we could have a 50% off sale if the greeks discovered oil and gold, now, too, socGen...

this doesn't need contagion!  it needs some more contango!

Fri, 05/25/2012 - 13:42 | 2463064 Zero Govt
Zero Govt's picture

the Greeks did discover Gold and Oil, otherwise known to Greek socialists as the Euro Debt-Money Tree ...they've been living/sucking off it for 10 years (all good things come to an end)

Fri, 05/25/2012 - 10:58 | 2462305 mrktwtch2
mrktwtch2's picture

how about telling us something we dont know??

Fri, 05/25/2012 - 10:59 | 2462310 LongSoupLine
LongSoupLine's picture

European stocks have been "on the verge" for over 2 years now...


just fucking get it over with.

Fri, 05/25/2012 - 10:59 | 2462313 LULZBank
LULZBank's picture

Quick please. Europe is almost closing for the long weekend and I cannot wait for that long!

Fri, 05/25/2012 - 11:05 | 2462344 Cognitive Dissonance
Cognitive Dissonance's picture

It's not the fall that kills ya, but the sudden stop at the end.

Fri, 05/25/2012 - 13:47 | 2463082 Zero Govt
Zero Govt's picture

any Greek politicians or bankers committed suicide yet for the national trainwreck they've created?

how about the socialist Popalotoffukups political family who've ruled Greeces decline into the sewer??

Nope.. enough said

Fri, 05/25/2012 - 11:06 | 2462349 bdc63
bdc63's picture

Why aren't European stock markets dropping like a rock right now ... 1/2 hour 'til close before a 3 day weekend with scary headlines all over the newspapers ... I don't get it ...

Fri, 05/25/2012 - 11:25 | 2462433 SheepDog-One
SheepDog-One's picture

Reality will be seen only when they want the coordinated collapse one morning.

Fri, 05/25/2012 - 11:32 | 2462461 valley chick
valley chick's picture

SheepDog you do not see printing as an option do you think that it is by design by TPTB will pull the plug on the market? 

Fri, 05/25/2012 - 11:07 | 2462352 midgetrannyporn
midgetrannyporn's picture

Bank stocks won't go less than zero imo.

Fri, 05/25/2012 - 11:09 | 2462357 Dr. Engali
Dr. Engali's picture

I went to a 50% off sale once. All I found was more crap that was 50% cheaper.

Fri, 05/25/2012 - 12:04 | 2462398 The Big Ching-aso
The Big Ching-aso's picture



We are the world.   We are phucked.

Fri, 05/25/2012 - 11:38 | 2462493 jus_lite_reading
jus_lite_reading's picture

The worst is when you buy something at a 50% "discount" and the next week, it's at a 95% discount... In the immortal words of Homer Simpson, "doh!!"

Seems like the most likely scenairo until the "BIG PRINT" comes to "save" the day...

Anyone want to know how it all ends?

Fri, 05/25/2012 - 11:46 | 2462519 Dr. Engali
Dr. Engali's picture

Well if you liked it at 50% of you're going to love it at 95%'s called averaging down. ;->

Fri, 05/25/2012 - 11:15 | 2462392 Vince Clortho
Vince Clortho's picture

Does "Saving us All" involve giving more truckloads of money to the Central Bank Parasites?

Fri, 05/25/2012 - 13:53 | 2463099 Zero Govt
Zero Govt's picture

that's the plan

Davos has 2 superb policy initiatives:

1. dig yourself deeper in doo/debt to solve the debt problem

2. attach enlarged doo/shit to taxpayers

Brilliant thinkers at Davos, they're not there just for the 5 Star luxury while Rome burns you know

Fri, 05/25/2012 - 11:17 | 2462399 1835jackson
1835jackson's picture

Let the fucking system burn. We deserve the leaders we have. Apathy everywhere.

Fri, 05/25/2012 - 12:05 | 2462407 The Big Ching-aso
The Big Ching-aso's picture



I remember when communes were all the rage in America.   Looks like they're gonna be the rage again.

Fri, 05/25/2012 - 11:18 | 2462408 marketcycles79
marketcycles79's picture

There are some roadmaps that can make heads and tails of this market. I have been following my friends service for a number of years and like echen's analysis. It is well worth it to get on the right side of the trade. Brings a unique ability to see the "right side of the tape" using propriety methods.

Fri, 05/25/2012 - 13:57 | 2463117 Zero Govt
Zero Govt's picture

Elliot Wave Loon Alert

beware the pattern recognition asylum escapees, they can't recognise the pattern of their never ending failures and locked-in lunacy

Fri, 05/25/2012 - 11:21 | 2462415 The Big Ching-aso
The Big Ching-aso's picture



The domino-effect just needs God's middle finger to get things moving.


Fri, 05/25/2012 - 11:24 | 2462429 SheepDog-One
SheepDog-One's picture

Sure everything is just rice paper thin illusion...but we got HIGH HOPES of 'QE-TheBigOne' which will surely be here any minute just as soon as they allow any bit of bad news thru which will never happen, judging by todays phony 'consumer confidence' type BS. Dont you go panic just because all the 1st class passengers are piling into lifeboats, just keep listening to that free music on the aft decks.

Fri, 05/25/2012 - 11:26 | 2462436 h0ff13
h0ff13's picture

Chinese banks that just got licenses to operate in the US may have the ability to inject 10 Trillion dollars into the US economy by using their 1 Trillion in US Treasuries as base capital for fractional reserve lending.  They could turn their 1 Trillion in promises in 10 Trillion of assets by buying US businesses and real estate, etc by utilizing our own fractional reserve ponzi scheme:

I have been surprised not to see any mention on ZH about this possibility so far...

Fri, 05/25/2012 - 11:33 | 2462460 junkyardjack
junkyardjack's picture

lol, yes I'm sure they are in a rush to do that knowing the treatment that foreign companies get when a crisis comes around.  It's called nationalization and countries much rather do it to a foreign firm so the citizens don't get upset than their own.  China isn't so stupid that they would come in and try to corner the US by buying up all of its businesses because the US would just take them back for free after the Chinese invested all their capital in it.  And US banks have plenty of ponzi capital already, there is no one good to lend to.  Keep it moving, there's a reason this wasn't on ZH....

Fri, 05/25/2012 - 11:44 | 2462488 The Big Ching-aso
The Big Ching-aso's picture



"May you need a clean up on Isle 5."

-An Irish to Greek curse.

Fri, 05/25/2012 - 11:39 | 2462496 h0ff13
h0ff13's picture

Good point about the nationalization.  What if the FED was 100% behind this plan because they get easing without a QE - and it keeps the Chinese from dumping their Treasuries?  Another angle on easy money keeping the illusion rolling for few more years.

Fri, 05/25/2012 - 11:42 | 2462503 ReactionToClose...
ReactionToClosedMinds's picture

well ... tend to agree with you the PRC hesitant to 'buy Amerika' ... but then ... it is stunning to think that PRC can directly dialgoue with US Treasury about direct UST purchases (sales?) by-passing the primary market for everyone else.   This is more than 'mechanical' ..... me cynically thinks

Fri, 05/25/2012 - 12:07 | 2462659 brooklynlou
brooklynlou's picture

... or 10 Trillion in a European firesale after the Euro implodes.

Fri, 05/25/2012 - 11:27 | 2462440 junkyardjack
junkyardjack's picture

Outside of a couple banks, things are looking pretty bullish then I guess

Fri, 05/25/2012 - 11:36 | 2462481 RagnarDanneskjold
RagnarDanneskjold's picture

Meanwhile the unwinding of the carry trade for copper continues. Chinese speculators new asset? USD.

Fri, 05/25/2012 - 11:49 | 2462548 Nachdenken
Nachdenken's picture

 The DAX is down (from 7100 to 63++) over the past month. Greece already priced in.

Add in  Spain (Savings Bank nationalised this morning with 28 Bn EUR loss).

Then JPM is 122 Bn USD down, far cry from first estimate of 2 Bn USD.

Friday night and it will be all right. The fun is in bonds, and the EUR USD, JPY, AUD and CDN hedges. Stocks come later.

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