First some good news, the ratings agencies have finally cast themselves as the most consistent market indicator with an inverse correlation of 1.00, as downgrade events are now reflected in market moves higher. Enough said.
Italian Prime Minister Mario Monti has not been in office long enough to change a roll of toilet tissue yet already had to call for a confidence vote. This does not bode well for the future.
My view has not changed. Achieving ratification of the EU treaty will be akin to asking turkeys to vote for Thanksgiving. And even if the 24 non- French, non-German, non-U.K. governments do approve this union with a gun to their heads, compliance with their provisions will be tough to come by. Monti made that clear Saturday in a veiled threat to the Germans
To help European construction evolve in a way that unites, not divides, we cannot afford that the crisis in the euro zone brings us ... the risk of conflicts between the virtuous North and an allegedly vicious South.
In other words, “don’t even think about asking us to do anything that we don’t want to do such as collect taxes. Culturally, we don’t do that kind of thing.”
We saw some minor protests in the Italian parliament regarding the austerity measures, with the largest Italian labor union protesting more loudly on the cobblestone streets. Put into perspective, these protests are targeted at austerity measures being implemented by the Italian government. Can you imagine the anger when the Germans try to pull in spending? The Greeks rioted in the streets against fiscal prudence and cost G-Pap his job before the treaty was a twinkle in Merkozy’s eyes. I’m going to wait until Solution #6 makes the rounds at the next summit.
But I finally understand the lack of speed which the French operate. In fact, Friday’s legal accomplishments, the conviction of Carlos the Jackal for blowing up part of Paris and the conviction of Jacques Chirac for raping Paris, only took 30 and 20 years, respectively. Translated into sovereign debt issues, that should give French banks enough time for the terms of the CDS they wrote on sovereign debt to expire. Brilliant strategy.
Germany has made it clear they won’t pay up, the U.S. will not contribute to the IMF to bail out Europe and China will use its foreign reserves to buy Europe – not European debt – but rather Europe. I have asked many what they see as the solution to this crisis and no one has come forward with a solution prior to Europe’s Lehman moment. That’s what it took in the U.S., and we only have a 2 party system.
French banks will be nationalized as will others throughout the EU. But that is only part of the solution. Ultimately, the other twin, Mario Draghi, will have to print money and buy more bonds. The decline in the euro is far from over – this is only a momentary respite.
Of course, none of this bodes well for U.S. equities. While Europe represents only 15-20% of our end market, the contagion casts a much bigger shadow. S&P estimates will have to come down as the dollar strengthens, resetting valuations. Europe will cascade into recession and China’s economy will continue to contract, further hurting global growth and the U.S. recovery which has been tracking nicely.
The E&C sector and commodities have to continue to weaken as global growth slows. I like domestic stories that are not dependent on a burgeoning economy for earnings growth. Managed care remains a favorite and these companies continue to raise their earnings outlook as MLR improves with fewer doctor and hospital visits. Wellpoint (WLP) at 8.3X EPS with a massive buyback (20% of shares on top of 5% retired earlier this year) still looks cheap. If employment ever picks up, this will add to growth. Sequestration provides a better result for them than the elusive budget deal. Healthcare overall looks attractive. Allscripts-Misys Healthcare (MDRX), a company that provides technology solutions to doctor practices and hospitals, supported by a $30 billion incentive boost from the government to put all patients on electronic records, is inexpensive and it is an attractive acquisition candidate for a company such as Oracle (ORCL) that is on record as saying it wants to increase its presence in this business. I took a small position in Computer Sciences Corp (CSC), a stock that has been justifiably destroyed, while I do more work on it. Meantime I get a 3% yield which appears safe. And of course, there is Qualcomm (QCOM), unique in its fundamentals in the tech space.
As for Research in Motion (RIMM), the only question on this company is which will last longer, my phone or the company. Right now it's neck and neck. I used to love my Blackberry but now the service and my 18 month-old phone, perform as well as Michelle Bachman at a debate.
As to Bachman, she has to stop using Tammy Faye Baker’s make-up person to be taken as a “serious presidential candidate” (her words).
Additional disclosure: I may or may not trade around these positions.