The European Commission took Germany, France, Italy, Spain, and the United Kingdom out back to the woodshed for a financial thrashing yesterday, March 17. Now let’s see if the bond market was paying attention.
The bureaucrats in Brussels essentially called the budgetary bluffs of the biggest countries in the European Union. From Germany to Italy official government promises to get budget deficits back under 3%–the target for union members—are based on fiction.
Take Spain, for example. The government has promised to cut its current budget deficit of 11.4% of GDP for 2010 to 3% by 2013. (Just remember that European Union basket case Greece set off the current euro crisis when it suddenly “discovered” that its 2009 budget deficit would be 12.7% of GDP.)
No way, Jose Luis Rodriguez Zapatero, the European Commission said. The plan is based on predictions that the Spanish economy will grow by 1.8% in 2011, 2.9% in 2012, and 3.1% in 2013. Pretty heady growth when Spain’s economy is expected to shrink by 0.3% in 2010 and the country faces huge competitive problems in global markets as a result of growth in wages that exceeded growth in productivity.
The European Central Bank forecasts European Union growth at 0.4% to 1.2% in 2010 and at 1.5% for 2011. The OECD (Organization for Economic Cooperation and Development) projects European Union growth at 0.9% in 2010 and 1.7% in 2011.
You’d expect the commission to criticize deficit reduction plans for Italy and the United Kingdom, but Brussels didn’t stop with the usual suspects.
Germany and France, both projected to run budget deficits well above the 3% target this year, have also produced deficit reduction plans based economic fictions.
France, for example, is forecasting annual growth of 2.5% in 2011-2013. And Germany came in for a special mention because the government has not yet explained how it can deliver a shrinking deficit at the same times as it enacts tax cuts.
The French and German economies, the strongest in Europe are projected to grow by 1.4% in 2010. Budget deficits are forecast at 8.2% of GDP for France and 5.5% for Germany.
As the European Commission so drolly put it in comments about the French plan, “The strategy does not leave any safety margin if economic developments turn out worse than projected.”
Who says bureaucrats don’t have a sense of humor?
@VSA
When you say “but the last recession makes me weary of just focussing on share value and not timing the market.. people who did that lost 10 years of their value in matter of a month”, it seems to me that you are referring to the performance of the market as a whole, measured for example through the S&P 500.
But if you try to pick companies with good prospects, like Jim does, and stick to them until your target price is hit or the reason you bought them no longer applies, you may do much better than the market, as Jim’s performance in the last decade shows.
And if you really think that timing the market is important, then consider that, actually, “focussing on share value” is itself a way to time the market: it’s just based on company/sector fundamentals – and possibly macro trends – instead of price movements.
In fact, by focussing on share value, you could have avoided most – if not all – of the mayhem of 2008: in the second half of 2007 many stocks were definitely overvalued, so, based on share value, you would have probably sold them before they went skydiving, and waited in cash for better times and opportunities.
Thanks for the comments guys.. they were helpful.. I too have been using this rally to raise cash.. you are right, we can never predict what tomorrow brings.. but the last recession makes me weary of just focussing on share value and not timing the market.. people who did that lost 10 years of their value in matter of a month.. so as of now, my strategy is to invest and book the profits when I get suspicious of the rally.. it has caused me heartache sometimes as some shares keep rising! but i guess I am ok with that..
VSA,
I feel the EXACT same way Run does and couldn’t have said it better myself. As I said in my earlier post, we never know what tomorrow will bring..and in these days of the global economy, it makes forecasting tomorrow even that more difficult. That being said, I do feel like the market is due for a correction, but honestly I’ve felt like that for a few months now. I’m using this rally as an opportunity to raise cash until stocks I like are more fairly priced. Like Run I’m also a value investor.
If you’re new to investing, I strongly recommend you make sure the rest of your financial affairs are in order before you invest a dime in the market (3-6 months of living expenses saved etc…), if you already haven’t. Only invest $ that you’re willing and able to lose. Next determine what your investing goals and style will be (value, momentum, growth etc…). How much time are you willing to spend studying and educating yourself (rhetorical ques)? If you aren’t willing to spend much time (and most people aren’t) then do yourself a favor and invest most of your money in index or mutual funds. That will buy you some time and give you exposure as you spend time educating yourself and developing your goals. Anyway, I won’t go any deeper in that rabbit hole unless you want me to.
That’s my nickel’s worth of advice…..and it’s probably overpriced at that.
This site needs a forum for us to post in
On topic, how much power do the bureaucrats in Brussel have?
are they just talking big?
VSA… Yahoo finance has a 1 year target price in the quote and MSN Investing has the “Research Wizard” that can also give you some guidance on target price.
I am more of a value investor, so the cash I have now is sitting and waiting for something on my watch list to drop to a price I like. Personally, I am leery of the rally in the market and think some type of correction could come. I’m not convinced the “recovery” is really doing anything except pumping up the stock market.
As you invest you will figuire out what style appeals to you. If you can sleep at night, then you’ve got it right.
Thanks catengineer, run26.2, georic and chemace.. I did read Jim’s article asking us to re-evaluate the stock when it meets your target price.. The problem for me is that I am too new at this, and don’t know what the target price is. That’s the reason I love this forum. Jim, along with you guys are a great source of knowledge.
Anyways, I like the idea of putting in more money when a good stock is down, or selling a portion of it if I am afraid it’s gonna go down. I guess, I need to form a strategy on how to invest. Oftentimes, I don’t have enough cash to buy when market dips, and then sometimes have too much cash position even when market is going up!
What do you guys think? Is it time to play cautious and conserve cash (currently I am almost 50% cash)? Or get invested? Does anyone of you think market is headed for a correction in the near term?
VSA… like catengineer I try to have a target sell when I buy (and a target downside sell). For a stock that has really gone up I have done 2 different things. Just keep riding it and be prepared to sell if something changes (see: TEVA). Or when it get to or past my upsdie target, I will put in a stop limiit order to protect against a fall. The final thought is if you get significant appreciation, sell a portion of your holdings and then let the rest ride. I did this last one with PBR, after multiple splits, I am now playing with house money.
catengineer,
Well, I figured you were from your other posts. That was my Reagan accent.
Drevil,
Toshay….I wasn’t being serious. You couldn’t hear my Ahnald Schwarzenegger accent on the post??
Catengineer,
I agree. The US controls the oceans and all trade routes and is almighty and all. But there is nobody shouting from the mountaintops about the US when it acts like a drunken fraternity brother using Dad’s (in this case China’s) credit card.
But don’t kid yourself about other countries not being able to hurt teh US by dumping treasuries.
VSA
Like you im very new to investing. With the situation you just mentoned it seems that you would just want to buy more of the same when the stock goes down if you are certain its going back up. Why pay(commissions and capitol gains) to sell it then pay again to buy it again when you could just buy more shares.
VSA,
One thing I forgot to mention is you need to consider the stocks current performance from when you bought it. If you’re up 30%, (and you want to gamble) and think it will fall 10%, then go up again, you might be better off keeping it.
Fairy tales. That’s sounds like an opening for a storyteller comment. I believe it was an FBI agent, a rookie, who walked into an eatery and said, “where’s the beef?”, expecting a freebie of sorts. The mini-scandal turned into a commercial extravaganza. Perhaps we need more bureaucrats from the European Commission looking for beef somewhere in the world that isn’t tainted by accounting fairy tales. Certainly the current budget tales speak for a secular bear market for the next decade or two. Everything we’ve known to be “growth” over the last several decades has been driven by middle class consumption. So “where is it?” Brazil? That’s at the start of a long chain linked to consumption growth. Where’s the beef?
Drevil,
We have the biggest, baddest military in the world…noone takes us to the woodshed!
VSA,
1. Sell a stock when the reason you bought it in the first place no longer applies. I think Jim wrote an article on this a while back if you can find it.
2. You (nor me, Jim, or anyone else) knows when a stock will drop, nor by how much. Trying to be a fortune teller in this game is a good way to go broke, or minimize profits at best. When I buy a stock, I usually set a target sell price (actually I go by % increase). Once I get there I reevaluate things and make a decision from there. But be mentally prepared to accept the fact that it may continue to rise. Otherwise you’ll be happy you sold. Don’t try to time the market…..ever.
VSA, as you state the case, the answer is an obvious one: you sell and, then, buy again.
Problem is, excluding a general crash, you never can be sure how a specific share will react.
I like Jim’s approach: try to read the long term trends and buy accordingly.
So who takes the US out back to the woodshed? China?
Nice article Jim. It goes back to my earlier comment (in response to Greek debt) that market will react to EU countries budget crisis.. As of now, it has been ignoring all the uncertainity and is steadily rising.
I am fairly new to investing and continue to grapple with couple of questions:
1. When to sell a share?!!
2. Do I sell a good share knowing that it will drop around 10% of its value due to market correction, and then buy again. Or do I keep holding?
Your comments and other readers comments are much appreciated.
I’m surprised they could get so much accomplished being under the influence of so much Guiness!
LOL Jim!!!