More worries for the euro. This time from Spanish politics.
Prime Minister Jose Luis Rodriguez Zapatero has set a September 30 deadline for announcing his government’s budget plan. Investors want to see a combination of taxes and spending that reduces Spain’s budget deficit, the Euro Zone’s third largest. But they’re skeptical that Zapatero can deliver: Since July 27, the spread between the benchmark 10-year German bund and the Spanish 10-year bond has widened by 0.3 percentage points to 1.79 percentage points. The spread’s historic high since the introduction of the euro came on June 16 at 2.21 percentage points.
The skepticism is well founded. Zapatero heads a minority government that depends on the votes of six members from the country’s Basque Nationalist Party, which advocates separation from Madrid, and abstentions from at least one other lawmaker, to achieve a majority on the budget. If he can’t pass a budget, Zapatero’s Socialist government is likely to fall.
Which is, perversely, the reason the budget is likely to pass.  The prime minister has run a minority government since 2004, cobbling together one fleeting coalition after another. An early election, if the budget fails, would probably go to the pro-business People’s Party according to recent polls. That gives left-wing parties that have voted with Zapatero in the past incentive to find grounds for a deal again.
The real problem for Zapatero is that his own party has shown no enthusiasm for the kind of spending cuts and tax increases that the country needs to convince investors not to sell Spanish bonds and push up the interest rate that the government has to pay on its debt. The strongest action the Socialists have taken was to pass a 5% cut to public sector wages and a freeze on pensions back in May. And that only passed by one vote.
The cliff hanger will further unsettle the European debt markets, which are already pushing up the interest rate spreads on the heavily indebted countries of the Euro Zone periphery—Ireland, Portugal, Greece, and Spain.
The markets won’t rest any easier knowing that Zapatero’s union allies are planning a general strike to protest spending cuts on September 29. (For more on another poster child for the euro crisis, see my post https://jubakpicks.com/2010/09/13/dont-get-too-excited-about-the-euro-greek-crisis-still-isnt-over/ )
java12jack,
I do look at the past 5 years (assuming a company has been around for 5 years). With a growing company, I tend to put more weight on recent performance. Where there is a situation like you describe with two basically established companies, you also have to look at their industries (perhaps one was in an industry more economically sensitive, so naturally went down in the recession) and at recent management changes (did they get a new CEO recently?), or even recent corporate structural changes (did the company do a buyout that was dragging on their performance?).
Most importantly, read the “Management Discussion of Results” section of their latest financial statement, which will usually explain why their performance has improved over past lackluster performance. Mind you, read it with a skeptical eye, but still read it.
Ed,
Sorry to keep asking questions but like to get other investors thoughts. When you compare two stocks like ITW and CMI do you take any consideration into the past 1,3 and 5 year returns? CMI has had great returns over those periods while ITW returns have been lackluster. I am leaning toward ITW as an investment because it seems like better value I wonder why there is such a discrepency.
java12jack,
PEG is a factor, especially when I am buying a stock for growth. On the other hand, if I am buying a stock for it’s dividend, PEG is a “nice to have”, but not necessary.
In the case of both of those stocks, PEG would carry more weight because the dividends are low. However, the fact that ITW has a higher yielding dividend and a higher PEG and a lower current P/E is what would sell me on that one, assuming the financials don’t reveal any hidden flaws (I have not read through either of their last quarterly financials).
Ed,
How much do you take PEG into account when you are looking at or comparing stocks. I am looking at CMI and ITW as possible buys on a pullback and Cummins has a 1.45 PEG and ITW has a .79 PEG. I know there are other factors in play but just curious how you would look at the two.
Will this shake the market as Greece did?
java12jack,
I’d look to pick up CMI at $75, if possible.
Thanks Jim, more great insight on internals of foreign nations that impact our investments here.
When the EURO tanked in the spring, PM tanked with it. PM gets 40% of its revenues from EURO countries. I assume this is cause and effect- EURO drops, the amount of dollars it buys to distribute as dividends drops, PM stock price drops.
But what the hell do I know about Forex? Nothing.
Anyone have any views, contra or otherwise? Looks like the EURO has nowhere to go but down. and PM looks toppy.
Ed,
I know Jim likes CMI but it is up over 83% YTD. Seems like if the market pullsback this could get hit on profit taking. At what price do you think would be a good entry point?