Memo To Investors: We're Not The United States Of Europe

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 |  Includes: AIG, BAC, C, CAT, CMI, DE, F, GM, JOY, JPM, M, TGT, VFC, WFC
by: Brian Nichols

In 1788, the United States Constitution was ratified and the following year the first Senate, House of Representatives, and President took office. More than 200 years ago, our country broke free from Britain, opposing "taxation without representation," during the Revolutionary War. Those brave men fought so hard for what was right, to establish this country and its supreme law, the United States Constitution.

This brief history lesson is a reminder that this country is no longer a part of Europe. Yet, most would agree that the majority of panic and economic fear regarding the immediate future of our economy has direct ties to Europe. Throughout the history of this country, the United States has kept close ties to Europe in business and trade. We have corporations in Europe, with the most successful companies in America being successful throughout the globe. Yet now with so many questions regarding the economy in Europe we are asking ourselves, to what degree does the relationships with Europe affect the United States economy.

The economy is both a local and international system based on domestic and foreign success. We rely on one another for growth, and when one economic region is weak is presents problems for the entire system. As investors we all know this, and it's why a large portion of our markets have declined with such an accelerated speed.

But it still doesn't answer the question of how much our economy is dependent on Europe for success. According to fellow Seeking Alpha writer, and chief economist at First Trust Advisors Brian Westbury, "of the five biggest banks in the United States there is $54 billion of exposure & $713 billion worth of capital, which doesn't seem like a world ending problem to me." Brian Westbury made this statement during an interview on Tuesday October 4 during CNBC's Closing Bell. And I agree that if this number is correct, or even close, that the exposure is very limited to the debt in Europe, and since we are talking about the five largest banks, we can probably assume which banks have the highest levels of exposure. While Bank of America has several complex issues its primary business is consumer banking. But Citigroup is a commercial bank that has a very strong global presence, which could expose the company to a large portion of sovereign debt or other financial issues in Europe. Yet even with the likelihood of exposure to European debt, it's still minimal, with each of the large banks operating in the United States as a primary source of income.

The markets have really collapsed over the last 3 months, on fear that the European financial crisis will spread into the United States. This fear has obviously affected the financial sector with the largest banks losing a large portion of value during the last 3 months, as seen below.

Wells Fargo & Company WFC 16% $24.9 Billion
JP Morgan Chase JPM 26% $44.1 Billion
Citigroup C 43% $54.82 Billion
Bank of America BAC 48% $54.47 Billion
Click to enlarge


The chart above shows the value that each of the 4 stocks have lost over the last 3 months, as both a percentage and market cap. These 4 banks have lost nearly $180 billion combined, and while the banking industry has problems with the housing market and unemployment, I still believe that the largest portion of the loss is related to the European financial crisis, and investors fear that it will affect the U.S. economy.

Recession has been the topic of choice over the last few months, ever since the debt debate sparked additional concerns about the health of our economy. As a result, the markets have been volatile, with investors ready to sell at the first hint of bad news.

Tuesday night, Jim Cramer spent some time talking about this issue, and the affects that Europe is having on our economy. According to Cramer, the economy is much different than it was in 2008, and he used several stocks to describe the progress that the economy has made.

I enjoyed the comparisons to Caterpillar (NYSE:CAT), Deere (NYSE:DE), Joy Global (JOYG), and Cummins (NYSE:CMI) in which he spoke about the total collapse in credit that caused orders to evaporate for these companies causing the stocks to slide during the recession. Each of these stocks are performing much better fundamentally with balance sheets that are much improved. Yet each stock has experienced a large amount of loss over the last 3 months with questions regarding the financial strength of our economy.

If this were 2008 the auto industry would be slashing estimates in half, firing employees, and preparing to be bailed out by the government. However, two of the largest most successful companies within the industry; Ford (NYSE:F) and General Motors (NYSE:GM), are "brimming" with cash, finishing new contracts with the UAW that will create 1000's of jobs, and posting incredible monthly sales that show the success of each company. But both stocks are trading near 52 week lows with 30% losses over the last 3 months.

Cramer also mentioned retailers such as Target (NYSE:TGT), Macy's (NYSE:M) and V.F. Corp (NYSE:VFC) saying that in order for 2008 to repeat itself that retailers such as these 3 would have to be hit. However, each of the 3 companies has fundamentally improved with much stronger balance sheets.

Finally, the much debated American International Group (NYSE:AIG) and according to Cramer, if 2008 were repeating itself, the company would go belly-up again regardless of the fact that it is a “totally reconstituted [company] with an amazing balance sheet.” Yet despite this fact, if we care to look at its 3 month performance it's lost more than 30% of its value.

So how are we investing? We just looked at retail, financial, automotive, and construction which were 4 of the hardest hit industries within the market during 2008. And each of the industries are performing substantially better in comparison to 2008, yet stock performance has been dismal. I don't think this conundrum can be explained as it's hard to explain the mindset of the investor during the last few months. Because it appears they are ignoring all fundamental data from the companies, focusing on indicators, and speculating about the European financial crisis.

Indicators are exactly what they sound like, they are indicators to inform investors of the future direction of a company or the economy. These indicators have been discouraging, and as European woes continue to worsen the indicators continue to reflect additional panic within the markets. Yet very few companies have lowered guidance for either short or long term goals. And since the companies are required to inform the public when they are aware that expectations will not be met I believe it present optimism that the economy will recover as stocks present unprecedented value.

The majority of investors will continue to attach these stocks to Europe but I believe the most successful investors will have the ability to look past the fear and the questions of Europe and see that the U.S. is much different with companies that are performing exceptionally strong yet trading particularly low. This is not the United States of Europe, although it may seem so. It's the United States of America and although I feel empathy for the European financial crisis it does not affect the U.S, not to the extent at which it's being traded. We are still recovering from the worst financial crisis since the Depression which was only 3 years ago, but we must learn how to identify value in this market and understand the difference between 2008 and 2011.




Disclosure: I am long GM, CAT.

Additional disclosure: As with any investment, due diligence is required. The opinions in this article are not intended to be used to make a particular investment or follow a particular strategy.