Grease!

Greece held their national elections on Sunday and the electorate threw their support behind the pro-bailout New Democracy party. Taking 130 of the 300 seats the next step is to put together a “pro-Euro” coalition government.

New Democracy leader Antonis Samaras believes that with this vote, Greece has secured its place in Europe. But that may be wishful thinking! Unless Greece is willing to swallow the harsh medicine prescribed by eurozone leaders it will continue to infect the region. Eventually forcing other member States to carve out Greece as a Doctor would a cancerous tumour.

This election simply reinforced a point of view that staying in the eurozone with its attendant austerity measures is the lesser of two evils. It will also grease the wheels for central banks because the election takes the imminent exit from the eurozone off the front pages. As a result, I would not be surprised to see short-term pop in the European markets. Emphasize… “short term!”

As I see it, the only solution that: 1) is politically palatable and 2) sustains the eurozone in its current form is one that is supported by growth. That will not come from the private sector… certainly not in time to save the union.

The other tool is to have governments at all levels stimulate growth with infrastructure spending while central banks pump money into the system. The so-called bazooka! But that too is unlikely as governments in the eurozone are already over-extended and in the end, such a strategy simply pushes the problem down the road.

Longer term I cannot see any strategy that sustains the eurozone in its current format. Greece is simply the poster child that marks out the chasm between have and have not States revealing the eurozone for what it is… economically incompatible. Over time the electorate within the “have” States will grow tired of providing constant handouts which will eventually make the union politically unpalatable.

If you want to play the election card over the next week we want to see if the market rallies and if it does, take advantage of the higher prices by executing bear call spreads on exchange-traded funds that track the eurozone. Specifically look at writing bear call spreads on iShares EAFE Index Fund hedged to the Canadian dollar (TSX: XIN, Friday’s close $15.79).

I would look at writing the XIN August 15 calls while buying the XIN August 17 calls for a net credit of $1.00. You will only see that kind of credit if the market rallies above $16.25 during the week. The other approach is to buy XIN August 16 puts at 35 cents or better. Again that will only happen if the stock rallies during the week.