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Earlier in the week, when Germany floated the idea of an orderly Greek default, French banks brutally sold off. The lesson learned? We are now 100% sure that even an orderly default would lead to bear raids on those banks holding Greek debt, and that no level of capitalization would be sufficient to protect those banks. The fact that capital requirements are tied to not only mark to market valuations of sovereign debt, but also to stock price, makes a default in the current environment impossible. Absolutely impossible. French banks would fail. Soon thereafter, investors would raid German banks that hold sovereign debt from Ireland, Portugal, Spain and Italy. There is no such thing as "ring fencing" your banks from a sovereign crisis. Banks are still too fragile and too leveraged to deal with the capital consequences of a contagious default. As European leaders come to grips with this reality, the stock market will rally.

Tim Geithner heads to the troika meeting this weekend, and his message will be that Europe has to get ahead of this problem. A coordinated bailout is the only solution, because regulators remain on the wrong side of the accounting standards. IASB Chairman Hans Hoogervorst, after losing his battle to eliminate mark-to-market accounting of sovereign assets, is now forced to participate on the opposite end of the spectrum by enforcing the mark-to-market rules that he attempted to get rid of.

He recently made an unprecedented move by criticizing many European banks who have not taken sufficient write downs of current holdings of Greek debt. “This is a matter of great concern to us” he said. “It is hard to imagine that there are buyers willing to buy those bonds at the prices indicated by the valuation models being used.” Fair value measurement and impairment losses were expressed “in a way that seems to differ from the objective of accounting standards.”

The banks are utilizing mark-to-model rather that mark-to-market. Smart investors have been watching this regulatory war play out, and it’s obvious which direction we’re heading: toward a liquidity crisis in Europe, unless euro leaders stop criticizing Greece and start instilling confidence through a TARP-like backstop. I’m hopeful that this kind of response is soon at hand because of the harsh market response to Germany’s plan to try to ring-fence its banks.

German Chancellor Angela Merkel is our new best friend. If she can keep the German extremists at bay, it is likely Greece will continue to receive bailout money and we will get a strong U.S. rally in the fall. It is expected that Greece’s troika of creditors (IMF, European Union, and European Central Bank) will give the thumbs up for the disbursement of the next 8 billion euro tranche of its bailout later this month.

The troika left Greece meetings last week without approving the September tranche, but Greece recently announced property tax hike will raise an extra 1.7 billion euros to close its 2011 budget gap, in addition to a one-month salary cut of all elected officials. If this tranche gets approved, the next tranche isn’t due until December, which means we shouldn’t have to deal with Greek news for at least the next two months.

We are confident that the September round of financing will be approved for Greece, the Chinese will protect Italy, and Apple will surpass even the highest of expectations at the iPhone 5 launch. We disagree with Jim Cramer that the "Lehman Europe" event is going to happen at this stage of the game.

Verizon announced that it will join AT&T in offering prepaid phone plans that are rumored to be a preparation for a cheap iPhone 4S to be released alongside the iPhone 5. If this is true, and the cheap 4S becomes an accepted prepaid option in the U.S. and in foreign countries, Apple will likely hit $500 by January on the iPhone market share catalyst alone.

In other news, China Telecom announced it is spending $235 million for an iPhone 5 advertising campaign that should help Apple to increase critical mass in China even beyond its recently reported 600% revenue growth in the country. We’re all waiting for an announcement from China Mobile, but China Telecom is no slouch -- it's larger that Verizon and is believed to have the ability to add $9 billion in revenue opportunity for Apple.

As portfolio managers, it is always our job to control and avoid as much risk as possible, which explains our moves to cash over the past week. However, it is also our job to put the pedal to the metal at the opportune time, because the windows of opportunity get smaller and smaller in this age of volatility. With Europe improving, the sky is the limit for an Apple fall run.

Disclosure: I am long AAPL.

Source: The Tide Has Shifted In Europe, And Apple Is Now In Season