Blame it on Lisbon…and Madrid and Budapest.
First it was Greece. Now it’s Spain, Portugal, and Eastern Europe.
Heaven forbid that investors shouldn’t have a financial crisis somewhere in the world to worry about.
A European Union pledge of support for the Greek government’s plan to cut its current 12.7% (of Greek GDP) budget deficit down to 3% has some investors deciding that the Greek crisis is settled enough so that they can start worrying about problems elsewhere in the European Union.
That’s not to say that Greece is out of the woods. Greece’s ASE Index was down 2.7% as of noon in London on news that the country’s biggest labor union is planning a strike to protest the wage and job cuts in the plan.
It’s just that investors are now taking a harder look at other potential trouble spots.
Portugal’s PSI-20 Index was down 4.2%, the biggest decline in 14 months, as of 9:00 ET in New York this morning (February 4). Spain’s IBEX Index dropped 3.7% to the lowest level since July. The price of credit-default swaps to insure against a default by Hungary climbed to a record.
Investors fear that huge budget deficits in these countries could lead to further cuts in the credit rating on their sovereign debt.
As you might expect on recent trends, all this uncertainty was good for the U.S. dollar as the currency moved up against the currencies of 15 out of 16 of the country’s biggest trading partners.
That worry, in turn, has sent commodity prices down—gold is down almost $40 an ounce as of 11 a.m. ET—and increased the downward pressure on U.S. stocks that were already struggling on news that showed more U.S. workers than anticipated filing new claims for unemployment in the past week.
The stock market has divided its days lately between declines when investors, focusing on bad news from overseas economies from Greece to China, flee riskier assets in favor of the U.S. dollar, and advances when investors, focusing on good earnings and economic news from the United States, feel free to put money back into commodities and some overseas markets.
Today definitely falls into the first group.
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Jim,
Please explain why BRF, and the Brazilian market as a whole, is going down on this news? While Brazil does export some to Europe, it’s not nearly enough to justify a major drop in Brazilian stocks. If Europe fell off the face of the Earth, I could see a 10% correction in the Brazilian market, but that’s all. What am I missing here?
to EdMcGon – since when does logic apply to the markets on a daily basis? Dramatic sell-offs don’t need a reason underpinned by something fundamental.
tostoryteller,
Amen to that!
BRF update: I’m not seeing the bottom yet. We may even see $41 by day’s end, or tomorrow. Stay tuned…
Ed, I shorted Brazil (via BZQ) about a month ago because when I analyzed the indicators it screamed Brazil was overbought and overpriced. PE, capital flows & the strength of the Real were well above their normal levels. I just put in a stop loss 10% below the current price, so I’m think this trade is about done, hope I’m wrong though.
Sit tight everyone. No need to panic! It’s just PIGGS working.
I have bunch of low offers pending there. Bought two this morning.
Jim:
Any chance to explain STD ‘s exposure to this PIGGS? Thanks.
Purewater,
Please keep me posted on your short. While I disagree with you, I do like to hear the contrary opinions too. Exactly where would you buy into a Brazilian-based ETF like BRF?
YX, very simple. Look at the name. PIIGS includes Portugal and Spain.
Company description:
Banco Santander, S.A. (Santander or the Bank) is a bank holding company. Santander operates principally in Spain, the United Kingdom, Portugal, other European countries, Latin America and the United States, offering a range of financial products.
Thus high exposure to any turmoil in these markets, cause that’s where they do business.
EdMcGon,
In response to your comment: “If Europe fell off the face of the Earth, I could see a 10% correction in the Brazilian market, but that’s all.”
I think this is not a good judgement. The Euro zone is as big of an economy as the US. When the US falls off the face of the earth as has just occurred figuratively, the entire world markets lost way more, 50% in many cases. A 10% drop in Brazil is way too small of a worse case scenario. There are many more interconnections between countries than just the book numbers on trade. And these correlations are often nonexistent during “normal” times, only becoming apparent during turmoil.
Wish I would have waited a week to buy ABV…glad I waited a few days to buy BRF.
@catengineer
a strategy I use to deploy is buying in pieces (given the low cost of trading these days) and avg down in times like these.
DO folks have an opinion (i.e. good to to pick) STD?
sourlemon,
What does Europe make that isn’t made elsewhere? If Europe fell off the face of the Earth, that would mean, just to give a few examples:
1. More business for California wineries.
2. More car sales for Japanese and American car manufacturers.
3. More sales for chocolate manufacturers around the world.
You’re forgetting the old adage, “Nature abhors a vacuum.” Even if Europe Inc. went out of business tomorrow, the business world would just replace it’s output from other areas of the world.
I think STD’s latin american operations are pretty solid. I’ve had them on my bank watch list for a while. I wouldn’t buy today – if I recall correctly the ‘Greece correction’ was multi-day…
I took a nibble on NUE Sept. calls today, though…
NB,
I’d stay away from STD for now. Assuming they don’t take a hit from the current problems in Spain and Portugal, then you should be able to get it a bargain price later.
I’d wait to see their next quarter’s earnings first.
EdMcGon,
To take your example further, what does the US make that isn’t made elsewhere? What about China? Take any region and you can extend your example, but that doesn’t make it correct.
On the flip side, the world loses many consumers that will cut back. Any company doing business there will be in a lot of pain, investors in those companies will worry, suppliers will feel the pain, other customers will worry about sourcing problems. Financiers will panic and hunker down, hurting others. We’ve just been through this.
The rest of the world may fill the void, but not until months or years of pain. And output is only one small part of the equation that none of us can fully see.
Correction: July calls on NUE
Thanks, Jim, for bringing NUE to our attention!
NB,
I have a basket of stocks that I plan on holding on to forever…(almost) no matter what. For those stocks I dollar cost average. For stocks that aren’t in my “forever” basket, I set a target buy price and jump in there. I go through a pretty good analysis before determining what that target buy price is.
Thanks for all the comments on STD.
Disclosure:
I own STD already and intend to more.
Sourlemon,
Tru dat….I don’t know how serious Ed was, but we certainly don’t want Europe to go under. That’s millions fewer consumers for US based companies. And more importantly the world would lose an important democratic government which would make our fight against radicals tougher…but that’s another story, for another day, and another blog.
Folks, I’m not wishing bad things on Europe! I was merely using exaggeration to make a point: Even with the problems in a few of the lesser European countries, that does not portend a major world economic catastrophe.
Hypothetical: Let’s say Greece’s government goes bankrupt. Does that mean all the consumers in Greece stop consuming? Nope. Does that mean all the companies in Greece quit running? Nope. It means Greece will take some economic hit. It’s safe to assume Greek consumers won’t consume as much, and some Greek companies might go out of business while Greek GDP will drop. However, on the world economic stage, this will be a drop in the bucket. China’s growth in both consumption and productivity in a month might more than take care of the world’s loss of Greece for a year.
But this is hypothetical. Greece is not going away. They’ll have some hard times, then they’ll bounce back eventually. Seriously, does anyone here honestly think all of the companies in Greece will go out of business? Half of them?
Ed, For a variety of reasons I won’t bore you with, I’m not a big Brazil fan. I think Panama and Colombia are much better stories going forward. Nonetheless, if BRF got back to the mid 20′s, that would imply a PE of around 8 and that would get me interested. However, I don’t buy anything unless it’s dirt cheap because I hate losing money, so I’m not saying I expect it to fall that much, although it wouldn’t surprise me.
That’s cool Purewater. I appreciate the input!
Buying BRF in increments on the pull back. Right, Mr Jubak?
@catengineer
thanks for articulating the 2 baskets (very well). I do that except I didnt view them on the way you described – sort of an investment basket v/s a trade basket.
Ed… if Europe disappears I’m reporting you to the Feds…
Believe me, if I had that much power, all my stock picks would be golden!