Buying Europe

Includes: EWG, F, FXE, GM, TM
by: Michael Shulman

German consumer spending contracted in June - the data came out yesterday - no surprise here I recently returned from a multi-nation visit to Europe, including Germany, and the mood was not glum but it was barely more than somber. The summer tourist and spending season is slow -- and that includes Germans traveling elsewhere - and the impact of the Depression in the Mediterranean countries, the recession in France and the slowdown in China are all having their impact on German exports.

Germany lives and dies with exports - maybe that is the reason German companies built Saddam Hussein’s bunkers and have shipped a great many centrifuges to Iran. The country has the largest amount of external debt - public and private - of any developed nation in the world. And everyone in Germany knows this.

So, whither Germany and by default, whither Europe as the recession creeps into northern European economies? Better still, what should an individual investor do to take advantage of the slowdown in Europe.

First, avoid European stocks, especially the banks. Forget the noise coming out of Germany about how strong sand virtuous they are – their banks are a wreck and their state owned banks, the Landesbanks, are (probably) more leveraged than Lehman Brothers before it went bust. Second, avoid U.S. companies overly dependent on Europe. Many big multinationals have a big presence there but at the same time the problems they face have been factored into their stocks.

And that leads to two great investment opportunities. The U.S. automakers, Ford (NYSE:F) and GM (NYSE:GM). I write about them a lot, I am writing about them again now that earnings are out and my previous optimism can now be seen as terrific prognostication. I first recommended Ford at $8.25, it is north of $17, I first recommended GM a bit north of $20, it is now a bit north of $36. Both recommendations came from a factory visit to the GM pickup truck plant in Flint (you can read more about this in Made in America: Inside Stories of Success, and yes, I wrote it). When you see and hear things up front and personal, you learn a lot.

Business is booming – people have old cars, the average age of a car in the U.S. now more than ten years, have access to credit – my cockapoo Sumo has a better credit score than many current auto buyers - and the new monthly payments are just a tad above the cost of maintaining an old car using way to much $4 gasoline.

What to do? Cars are not a hot “idea” – but they are leading the economy right now and the problems in Europe are baked into these stocks. Given their run, and the inability of the market top punch through 1700 on the S+P 500, if you buy the shares, turn around and sell some calls. You can generate a “personal” dividend of more than 20% a year selling calls on these automakers.

For purposes of full disclosure, I drive a Chevy Traverse, my sixth Chevy since I gave away my Volvo 240 with 185,000 miles on it. Volvo is now a Chinese company, never going to see one in my driveway again. I am shopping for a new Traverse and I recently read the Chevy Impala just won a "best in class" rating from Consumer Reports magazine. It beat out Toyota (NYSE:TM).