We haven't had a day in the past few months where the media has not bombarded us with eurozone problems. Most of the time, it is just pure rhetoric rather than anything concrete: as to the level of exposure our banks have, or the exact figures United States imports or exports from Greece, etc., we only hear about the countries that lend to one another, how the Italian and Spanish bond yields shoot upwards several hundred basis points, and how further PIIGS (Portugal, Ireland, Italy, Greece, Spain) bury themselves further in debt in comparison to their GDP. Just to put things into perspective, the picture below shows how tangled and complex eurozone lending has become.
I decided to dig deeper into PIIGS and dissect their economies of scale to see if United States can finally decouple itself in 2012 and move forward without Europe.
Italy has the 8th largest economy in the world and the 5th largest in Europe in terms of Purchasing Power Parity. Majority of its economy is driven by manufacturing of high quality consumer goods produced by family owned small to mid size companies: Ferraris and Gucci (OTC:GUCG) apparel just to name a few. Italy's economy grew by nearly 1% with the global economic recovery and rise of demand in its exports. Its debt servicing costs hinders country's ability to fight its fiscal deficit that rose 5% in 2009 and 4% in 2010. Public debt remains a little more than 115% of its GDP, which is 2nd in rank after Greece's 127%.
In 2010, it exported $447.2 billion worth of mechanical products, textiles, apparel, transportation equipment, metal, chemical and agricultural products. Its export partners were Germany (12.7%), France (11.6%), U.S. (5.9%), Spain (5.7%), U.K. (5.1%). In 2010, it imported $483 billion worth of machinery and transportation equipment, metals, wool, cotton and crude. Its import partners were Germany (16.7%), France (8.9%), China (6.5%), Netherlands (5.7%), Spain (4.4%), Russia (4.1%) and Belgium (4.0%). United States is not even on the list of imports, yet our stock market had a substantial one day drop on Italy's election and fixed debt issues, when there was nothing fundamentally changing in U.S. companies in terms of loss of business and softer demand.
Greece has the worst of it all: political corruption, public debt and unemployment above the eurozone average. It actually violated the EU's Growth and Stability Pact budget deficit numerous years and misreported figures in order to maintain the monetary union guidelines. These actions, in turn, enabled the government to hide the actual deficit from the EU overseers, allowing them to spend more beyond their means. Greece economy contracted by 2% in 2009 and 4.8% in 2010 with a deficit reaching 15.4% of GDP and debt levels rising to 127% of GDP. Its current unemployment rate is 17.6%.
Greece exports manufactured goods, food and beverages, petroleum products, cement, chemicals to Germany (10.9%), Italy (10.9%), Bulgaria (6.5%), Turkey (5.4%), U.K. (5.3%), Belgium (5.1%), China (4.8%), Switzerland (4.5%), Poland (4.2%). It imports machinery, transportation equipment, fuels and chemicals from mainly Germany (10.6%), Italy (9.9%), Russia (9.6%), China (6.1%), Netherlands (5.3%), France (4.9%) and Austria (4.5%). It used to import from United States military aircrafts, aircraft launching gears, engines and turbines, inorganic chemicals, oilfield equipment and coal. However, the sizes of those orders range approximately $1 billion or less per criterion, not so significant considering our $14.5 trillion GDP. Let's take a look at Spain.
Spain has the 13th largest economy in the world. Despite its recent real estate boom with construction reaching approximately 16% of GDP, it saw a tremendous rise to its middle class personal debt, which nearly tripled. Similar to our subprime crisis, the real estate boom of Spain came to a halt as the mortgages exceeded the value of their homes. However, country did take Germany by surprise in nearly surpassing their per capital income in 2011. According to CIA World Factbook, Spain's budget deficit has made it vulnerable to financial contagion from other highly indebted eurozone members despite its efforts to cut spending, privatize industries and boost competitiveness through reforms. Spanish banks' high exposure to the collapsed domestic construction and real estate market poses a continued risk for the sector.
Spain exports machinery, motor vehicles, chemicals, shipbuilding, electronics, pharmaceuticals and medicines to France (18.7%), Germany (10.7%), Portugal (9.1%), Italy (9%) and U.K. (6.3%). It imports fuels, chemicals, semifinished goods, machinery and equipment, medical control instruments and consumer goods from its following partners: Germany (12.6%), France (11.5%), Italy (7.3%), China (6.8%), Netherlands (5.6%) and U.K. (4.9%). Again, U.S. is not in the import/export partner list, but one U.S. financial company that does have significant exposure to Spain is Citigroup (NYSE:C).
Portugal's lack of productivity, growth and rigid labor market can be tied to its poor educational system. In 2008, 8% of the college graduates with academic degrees could not find employment, while the ones who had jobs were underemployed. Compare this to United States masters degree holders' 4% unemployment rate. The country's lack of competitiveness has also been overshadowed by Asia's low cost producers. Portugal's recent austerity measures included a 5% public salary cut and a 2% increase in the value added tax to reduce the budget deficit from 9.3% in 2009 to 4.6% in 2011.
Portugal exports include agricultural products, wine, oil, chemicals, plastics, rubber, hides, leather, wood and cork, wood pulp and paper, textile materials, apparel, footwear, machinery and tools to its partners: Spain (26.8%), Germany (13.1%), France (11.9%), U.K. (5.5%) and Angola (5.2%). Its imports are agricultural products, chemicals, vehicles, optical and precision instruments, computers and accessories, and semi-conductors from partners such as: Spain (31.3%), Germany (13.8%), France (7.3%), Italy (5.7%) and Netherlands (5.2%).
Ireland also saw a similar construction boom like Spain, but saw its strength diminish as 2007 marked the peak of its real estate. Property values have dropped 50% and the country was faced with significant reduced revenues and a burgeoning budget deficit. The 2009 budget cuts were not sufficient, and in 2010 the deficit reached 32.4% of GDP, which was the world's largest deficit in terms of GDP. IMF extended a $112 billion loan to aid Dublin in revamping their financial sector and avoid sovereign debt default. Ireland's austerity plan to trim additional $20 billion from its budget is expected to bring the country back to modest growth within four years.
Ireland's exports are machinery, computers, chemicals, pharmaceuticals, live animals and animal products. United States is the largest exporting partner at (22.1%), followed by UK (16.1%), Belgium (15.1%), Germany (8.1%), France 5.3 (5.3%), Switzerland (4.2%). In 2010, it imported approximately $62 billion worth of data processing equipment, machinery, chemicals, petroleum, petroleum products, textiles, and clothing from its importing partners U.K. (37.7%), U.S. (13.8%), Germany (7.6%), Netherlands (5.6%) and China (4.1%)
After looking at the import/export numbers, one can't help to conclude that maybe we should be paying more attention to Ireland (our largest export partner) rather than Spain or Italy. I also realize that due to globalization and trade, plagued European countries that have no direct import/export with United States still affect us indirectly one way or another. However, was the massive sell-off in our markets warranted? And was it necessary for CNBC, Bloomberg and other media outlets to hold hands together and pound our markets to the ground with pessimism (despite sound domestic economical indicators)? Not in my opinion. Stay on sidelines when the market starts bleeding, then pick up great bargains on sound blue chip names like Wal-Mart (NYSE:WMT), Chevron (NYSE:CVX), Home Depot (NYSE:HD), CNOOC Ltd. (NYSE:CEO), Coca Cola (NYSE:KO), Archer Daniels Midland (NYSE:ADM) that pay solid dividends. Even Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) have been sold off for no reason.
I believe that investor sentiment should change as the eurozone problems are already priced into Dow at 11,000 range. Folks, we are still faring better than 2009 and 2010 when Dow was at 8,000 and 10,000 respectively. If you come across articles claiming Dow will fall to 2009 levels in 2012, ask yourself whether these individuals are getting their information from the Mayan calendar or if they took the time to read about the robust Black Friday retail sales that surged 6.6%. (By the way, wasn't the Wal-Mart pepper spray story hilarious?)
Our economy's doing much better than these entertainer/fund manager/analysts would like you to believe. It's all about creating volatility and panic, because no one can find the intrinsic value of DOW or S&P500 to put a price handle on it, so their best bet is to make technical guesses based on support and resistance on "key psychological points" of round numbers. The only way you can invest with confidence, is if you do your own due diligence and use good old fashioned common sense to get you through these turbulent times.
Source: CIA World Factbook
Disclosure: I am long CVX.