Greece Loses - You Win

Editor's note: As part of our partnership with PBS's Nightly Business Report, TheStreet's Deb Borchardt joined NBR Monday (watch video and read transcript here) to highlight stocks that might gain if Greece defaults.


NEW YORK (TheStreet) -- The U.S. stock market seems beholden to Europe's debt problems these days, but so far the concrete developments have been few and far between.

The major equity indices always seem to get a lift whenever there's talk of a rescue plan for Greece, but so far, it's been all talk -- not real action. The problems with Greece have dragged along for three years now, but it looks more and more as if the powers that be are circling the wagons and preparing for the worst.
Word on the Street

The latest rumor is Europe's leaders are trying to put together a plan to recapitalize the banks over there. Unfortunately, such a plan would likely impact France's AAA rating and endanger the European Financial Stability Fund. Still, shoring up the strong banks in advance of a structured Greek default is a good way of calming people's fears.

If this comes to pass -- a strengthening of the banks so that in the event of a Greek default, financial institutions would be better able to withstand it -- then what is the best positioning for portfolios? There are a couple of ways to prepare for such an event. One is avoid the banks like the plague. All the banks are interwoven, while a regional bank probably has little exposure to Greece, the market tends to not discriminate and usually throws the baby out with the bathwater. The big banks most definitely would be affected by a Greek default. Most have already tumbled, but that doesn't mean they couldn't drop further.

The most obvious outcome is that the Euro crashes. The easy way to play this is the ETF ProShares UltraShort Euro ( EUO). This ETF goes up when the Euro goes down. If you compare this ETF on a chart with the Currency Shares Euro ( FXE), you see they move opposite each other. The FXE just recently crossed over the EUO. If this continues, expect to see the EUO to move up. If you think the Euro is done for, this is the ETF for you.

If you think the banks will be in hot water when they finally are forced to take a haircut on Greek bond holdings then the FAZ is the top pick. This is the Direxion Daily Financial Bear 3X Shares ( FAZ). Morgan Stanley ( MS) knows all too well what happens if the sharks smell blood or in its case, French bank exposure. The thinking is that if Greece goes then French banks will be severely damaged and if Morgan Stanley has $39 billion worth of French bank exposure -- Well, connect the dots.

Morgan Stanley isn't in this alone; the Bank of International Settlements believes there are $32 billion worth of credit guarantees written by U.S. banks. JP Morgan Chase ( JPM) has roughly $36 billion in exposure to the PIIGS Portugal, Ireland, Italy, Greece and Spain. Goldman Sachs ( GS), which originally helped the Greeks restructure their debt only to have it blow up, is probably the best positioned. They clearly know what's under the skirt and will surely profit. Goldman does have $8.3 billion in exposure to Ireland.

The list of reasons why the banks will do poorly is a long one and it isn't just foreign exposure that is hurting U.S. banks, there's also investment banking fees that have dried up. With volatility in the market, investment banking has been sitting out quietly on the sidelines. This is a big money maker for banks and is definitely going to hurt the third quarter. There's a reason the banks are all adding fees all of the sudden. The third quarter is going to be painful. So after all that, this bear case ETF on banks looks pretty good.

The next way to play this Greek drama is just by the sheer fact that it has dragged on for so long. It's been two years since this drama began when Greece's recession started in 2009. Rising debt combined with a limited ability to collect taxes or cut government spending has exacerbated the problem. The result of the European Union's inability to effectively address the situation has caused a great deal of volatility in the U.S. markets. A daily barrage of headlines feeds traders that sell on negative news and then buy back later and then sell again.

The Velocity Shares Daily 2xVIX ( TVIX) is the ETF of choice in such a choppy, uncertain market. If the volatility rises, then so does this ETF. The market looks so good for a product of this nature that ProShares has developed VIX ETFs as well, launching the product on Friday. Velocity is the most established of the VIX ETFs. iPath has the biggest ETFs of this kind with the iPath S&P 500 VIX Short-Term Futures ETN ( VXX) and the iPath S&P 500 VIX Mid-Term Futures ETN ( VXZ). Both came out in 2009.

Of course, no one wants Greece to default and no one wants a European financial crisis, but investors need to be prepared for the possibility, especially since Greece has not been able to meet the goals established in order for it to continue to keep receiving aid. However, an unstructured default would be disastrous. A controlled event is preferred and a portfolio can be positioned to take advantage of this.

-- Written by Debra Borchardt in New York.

>To contact the writer of this article, click here: Debra Borchardt.

>To follow the writer on Twitter, go to http://twitter.com/wallandbroad.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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