Europe Is Dicey

Things escalated quickly yesterday. The Network was in all hands on deck mode as the world tries to figure out if Europe is going to go out of business and take the rest of the planet with it. The countries on the front burner these days are Greece and Portugal followed by Spain and if you listen to Bill Gross the UK.

There is TV coverage and internet content dissecting every aspect of this as it certainly newsworthy and has a chance to be historic as the Iceland collapse was historic (don't take that as an attempt to predict magnitude).

One idea that I've written about countless times in the last two years has been the idea of one more shoe to drop. If this was truly the worst financial crisis in 80 years then there surely must be more fallout. Perhaps the focus moving to European and UK sovereigns is the next phase, it certainly seems like it.

I have been saying all along there would be reverberations and after this one there could very well be another.

The portfolio approach here should not, IMO, be figuring out which US bank does better than the others or how to pick from the various European countries to best weather the storm on the continent.

All of these current events started unfolding long before prices started imploding-- the collapse, or whatever this is, has been a very slow moving ship that, like many scary events, gave plenty of warning ahead of time. Long time readers may recall that I have simply avoided/been extremely underweight the financial sector and Europe long before the crisis.

We occasionally have discussions on this site about stock picking, sector picking and country picking. A point I try to drive home that I think gets missed is the equally important stock avoidance, sector avoidance and country avoidance. The folks who think along the lines of the Bogleheads think this sort of thing cannot be done reliably. It doesn't take a whole lot of reading and understanding of basic economics before you realize that a country might be in trouble and should be avoided. Or put in Hussmanian terms; where the risk reward ratio indicates returns are likely to be poor.

With a nod to the Bogleheads I think picking the one bank stock that won't get crushed or the best way to weather the storm in Europe are both very difficult to do. One way to think of top down management is that it involves ruling things out and looking through what is left to build a portfolio. If your portfolio today underweight the hotspots of the banks and the most troubled countries you have a decent shot of reducing your drawdown should things deteriorate from here.

Along those lines we recently added short term sovereign debt from Denmark. The country is obviously not part of the EU and while it is not riskless it does not have the magnitude of trouble that so many countries do.

One idea I had last week that could be kind of interesting but difficult to implement for most folks is buying short term sovereign debt from Finland. A breakup of the EMU is very unlikely but by virtue of having a much lower debt burden it is relatively healthy and reversion back to the markkaa from the euro could send that currency up dramatically. I'm not sayin' I'm just sayin'.