Despite Monday’s (May 10) huge bounce on news that European Union governments had agreed on a $1 trillion rescue package, I don’t think you need to chase European stocks. The stock and bond markets might have been convinced for a day that the Greek, Spanish, etc. debt crisis is over, but other parts of the financial system aren’t quite ready to declare that all’s well.
The euro, for example, started May 10 strongly but by the time the trading had followed the time zones to Asia the currency was in retreat again and gave up most of its gain from May 10. Similarly after improving on Monday the markets for credit default swaps, which let investors protect against the risk of default, and short-term money market interest rates essentially tread water in Asia.
All in all, on day two the financial markets seemed to be saying that they were glad to have the rescue package since it removed worries that Greece or someone would default tomorrow but the plan didn’t really fix the problem in the medium and long run.
So relax, the bargains that have emerged as investors marked down good and bad risk alike during the crisis are still around, May 10 didn’t put an end to them, and in fact they’re likely to get even more tempting in the weeks ahead. That’s because the euro is likely to continue to weaken. Even if the deal removed the risk of immediate default, it left huge questions about the long-term future of the currency unanswered. The European Central Bank has said that it will sterilize the money created by the rescue package but we’re talking $1 trillion here. It’s hard to imagine that some of that won’t get added to the money supply, pushing up inflation, and weakening the euro.
So what should you be looking for in a euro bargain? (Don’t forget U.S. bargains either. I’ve made three buys of U.S. since May 5: Cummins (CMI) https://jubakpicks.com/2010/05/05/buy-cummins-cmi/ , Whirlpool (WHR) https://jubakpicks.com/2010/05/07/buy-whirlpool-whr/ , and American Tower (AMT) https://jubakpicks.com/2010/05/10/buy-american-tower-amt/
First, you want a solid, financial sound company whose shares are being unfairly treated by the markets. This isn’t the time to load up on risky stocks that have been pummeled because investors have legitimate worries about the balance sheets.
Second, you want an exporter that can gain from the decline in the euro either because it makes raw materials cheaper (Yes, for most European companies a cheaper euro makes raw materials more expensive but I’ve got an exception in mind.), or because it gives overseas sales a boost by making the company’s product cheaper for customers who pay in stronger currencies.
Third, you want companies that aren’t tied to national economies that are going to see growth slow dramatically as governments try to reduce spending.
My suggestions?
Siemens (SI). Think of General Electric (GE) without the financial division that has turned into an albatross for the U. S. infrastructure company. Strengths of the German company are in factory automation, off-shore wind turbines, high-speed rail, healthcare diagnostics, and power generation and transmission. The stock recently traded at a forward price to earnings ratio of less than 14 and a price to sales ratio of less than one.
Vestas Wind Systems (VWDRY). In the last two months I’ve seen announcements of big orders for Vestas wind turbines from the United States, Turkey, Australia, and China. Who’s to say that the world’s largest wind power company (by market share) wouldn’t have won those orders anyway, but it sure doesn’t hurt to be a euro-based company when you’re bidding in strong currency economies.
Central European Distribution (CEDC). Nothing with “European” in its name has escaped punishment in the euro debt crisis, but the truth is that Central European Distribution, the world’s largest vodka producer, has very little exposure to the euro. Its biggest markets in Europe are Poland, Russia, the Ukraine, and Hungary. The United States is the company’s key market outside Eastern Europe. The shares were down 32% in the last month as of May 7 before rallying almost 15% on May 10. Wait for the stock’s volatility to give you another buying opportunity.
For more on when you might you get another dip that’s a buying opportunity—and how long the current euphoria might last—see my post https://jubakpicks.com/2010/05/11/theyre-back-the-european-banks-that-had-to-be-bailed-out-last-time-are-at-risk-again/
Full disclosure: I own shares of Cummins and Central European Distribution in my personal portfolio.
johntosetto,
this is in fact my (obvious) point: many people in these irresponsible states / countries are not leeches (most of if not all those who did not vote for the culprits, as well as those who did for other reasons – if any – and got no unsustainable benefit).
And I think that, in the current situation, it’s in the interest of the global economy, not just in their own, that these people may have enough money to sustain themselves decently.
Of course, there is no easy way to do it; but we can at least concede that they do not deserve to pay for other people’s “mistakes”, just like the taxpayers in the U.S / U.K / Netherlands and so on did not deserve to pay for the bailout of the financial system.
Here is another good reason to own AMT: “1 in 4 households with cell phone, no landline” and the link: http://news.yahoo.com/s/ap/20100512/ap_on_hi_te/us_cell_phones_only
Of course not every resident of the “leech” states is an outlaw or leech. Unless they vote for the politicians who refuse to return their state to solvency. Or drain the state’s coffers with illegitimate claims for welfare.
I guess my prediction of more strikes in Greece was on the money:
http://www.reuters.com/article/idUSLDE64B18U20100512?type=marketsNews
I have no direct or indirect interest in California / Florida / Nevada, but I wonder what your answer would be if the question were slightly reworded to become: “Would you call *ALL* the people in California, Florida and Nevada (and Greece, and Spain) outlaws and leeches?”
bsdgv,
What I find interesting is that I think you thought the people on here would answer your question with a no. 🙂
SPDTANIA
That’s why I said in my first post that my biggest concern is as election getting closer, politicians will do anything to keep things under wrap even it means more spending, more debt and more trouble down the road.
What got CA in trouble is its out of control spending over long period time. Have you heard of how generous CA’s pension? It’s shocking.
BTW, I really don’t kn0w much about FL and Nevada. I know they had real estate bubble.
bsdgv:
Read my original “outlaw” comment again. I said FISCAL outlaw which Greece is. EU has 3% cap for debt to GDP, Greece has way, way higher than that. People including Jim even suspect Greek cooked its book. They are outlaw.
“Would you call the people inCalifornia, Florida and Nevada outlaws and leeches?”
Yes.
bsdgv,
Answer to your question: YES.
A day will come (not too far away) when this socialized version of bailouts will have to end. There are taxpayers and then there are taxpayers…….
The politicians will go to extremes to keep this out of view – they need the subprime votes. But bailing out irresponsible, lazy, greedy people in name of “helping unfortunate” has to end if this country is to continue its advancement.
> outlaw countries like Greece …
> leeches …
What’s going on?… America has a subprime mortgage mess where US financial institutions lent money to subprime borrowers. These subprime borrowers in turn fueled a real-estate boom to make us feel good about ourselves.
Europe’s problems stem from financial institutions in Germany/France/etc lending money to subprime countries governments and people. These governments and people in turn fueled the economies of these top dog countries by importing from those countries.
Europe’s shit hit the fan before America’s just because Europe is not as integrated as America. German and French voters are unfairly against bailing out the Greeks and Spanish. The German and French also benefited from the European boom so they also should pay the piper.
What would happen if people not living in California, Florida and Nevada objected bailing out all mortgages in those states? Would you call the people inCalifornia, Florida and Nevada outlaws and leeches?
Vestas is also intriquing because they have manufacturing facilities in Colorado to take advantage of US demand. Depending on the Climate change bill and if grants for wind projects get extended, they could see a bump. I’m only speaking from a wind energy standpoint, I’ve not looked at the relative value of the stock.
I must admit, of the ones Jim named, CEDC is MIGHTY tempting! The only flaw I can see in it is a low ROI, but everything else looks good.
The main thing I like about CEDC is that it’s trading near the bottom of it’s range. I’ll second Jim’s buy on this one, although I won’t be partaking. I already have my portfolio balanced JUST right. If CEDC keeps dropping, I may have to change my portfolio to allow for it.
I have no appetite for European stocks, though I own a couple of them doing business globally.
My guess is that this $1T bailout will largely come from printing mill. EU, as a whole, will try to inflate their way out of the mess.
Kicking fiscally outlaw countries like Greece out of EU maybe a way to go or Germany’s quitting of EU may be a good idea for that country, but politicians will NOT want to prove they were wrong (to establish EU or take weak countries in)!
Here in US, my biggest’s concern is election is coming. Politicians will do anything to get re-elected, even if it means more spending and more debt!
Off Topic: They will name names OR Senate Approves One-Time Fed Audit:
“WASHINGTON (MarketWatch) — A controversial measure requiring the government to conduct an unprecedented one-time audit of the Federal Reserve’s economic crisis response programs was approved with overwhelming bipartisan support Tuesday by the Senate as part of sweeping bank reform legislation. The amendment also calls for releasing the names of institutions that received in total more than $2 trillion in loans from the central bank during the peak of the financial crisis. The provision received a vote of 96-0, with many lawmakers agreeing to back it following a compromise reached late Thursday. “This makes it clear that the Fed can no longer operate under the kind of secrecy it has been operating under,” said Sen. Bernie Sanders, I-Vt., the measure’s author.”