Europe Is Not The Problem!

In my last post I talked about why I think that Europe is not that big a deal to us in North America. That does not necessarily mean that I can sleep with not a care in the world. I just feel that everyone is focussing on Europe and they are potentially missing the big picture, which is China.

Economists are projecting around 4% global growth for this year and next year, or at least they were till Europe blew up. That is a pretty good growth number. We do not believe that the problems in the European periphery will materially impact these numbers. Continental Europe remains in decent shape, and its contribution to global GDP growth will not change materially.

Its China that has us questioning our global growth assumptions for the next 2 years. It feels to us that everyone (including the press) is looking to the right, when the real game is to the left. While everyone is trying to decide how real a Euro contagion scenario is, few are paying as much attention to what is going on in China.

While North American markets are in a correction phase, Chinese markets are in a full blown bear market. The Chinese stock market is already down 20% this year. The markets are telling us that something is wrong in China. The commodity markets provide further confirmation of this concern. Oil is off 12% from the beginning of the year. Copper is down 18% from its highs just 1 month ago. These are some of the commodities that China inc has been buying in large quantities to fuel their building boom.

China is in the midst of a tightening cycle. They have raised interest rates numerous times and they have tightened credit standards. The government is trying to cool the real estate market before it turns into a property bubble. One might question whether the government will be successful or whether they are too late.

The problem in China is that a lot of the real estate development is being done on spec. Sound familiar? Real estate is not being built for buyers who will occupy them, but for speculators who are buying them on leverage. This game of musical chairs continues until the speculators cannot unload the properties at ever higher prices or their loans get called.

The real question is, can the Chinese government slow the property market down without killing their economy (and the growth prospects for the global economy)? Not sure what the answer is, but that is what I believe is going on in the markets this week.

I have heard a lot of questions of why the markets are selling the Canadian dollar when the US Dollar is strengthening against the Euro? Seems counter intuitive that investors would sell Canadian Dollars when they are worried about countries with large fiscal deficits (Europe). Canada is actually in way better fiscal shape than the US. But, it makes perfect sense if one considers that that the Canadian Dollar is weakening along with commodity prices and a potential weakening of global growth prospects. Canada sells a lot of commodity stuff to China and if China slows, they will be needing less of the raw materials we sell to them (and at lower prices).

This thesis is also corroborated by the performance of the industrials and technology stocks over the last few days. These companies are most exposed to global growth and they have been the poorest performers over the last week.

In my next post I will talk about how we are investing in this climate.

Bear Market? Correction in a Bull Market

Riots in Greece, the Euro falling off a cliff, Oil trading below $70 and Gold on a tear. The headlines are ugly. It is all bad, or so we are led to believe. If only the media were able to predict the last bear market!

That bear market only ended 14 months ago. As tends to happen, current predictions are based on the most recent past. We tend to use the events of the last few years as a playbook for how the current news will impact financial markets. While few people were able to predict the severity of the bear market just 3 years ago, it seems as if everyone and their cousin can predict the next bear market, which is just around the corner. Financial markets do have a tendency of repeating history, but not with such a short lag between events. Very few people are willing to go out on a limb and say what is happening in the context of the current environment. It is easier to frame events from today in what happened over the immediate past.

So, should our economic and market assumptions be any different from our assumptions a month ago? Nope. Huh, did I just say no? Yup. What about all the bad stuff that I mentioned in the first paragraph? Greek riots are bad for Greeks, not sure it will have that big of an impact on North American consumer. The Euro is bad for European consumers and North American exporters ( but good for European exporters). Oil prices declining is a negative precursor to economic growth, but effectively puts more money in the pockets of consumers.

Do not get me wrong, things are not great. The US consumer is in trouble, but we know that. US real estate recovery has stalled, but it is not getting any worse. The US recovery is still in place and the problems on the periphery of the Euro zone are unlike to change that.

We continue to believe that the recovery will continue, but maybe at a slower rate than we thought a month ago. North American companies sell very little to the Southern European economies. Most US-European trade occurs with the Northern European countries, which remain in better shape than their southern brethren. The reality of what is going on with Greece, is that global growth will be a little less than originally thought, but growth will still be solidly positive.

Can you guess what the S&P 500 has done since it reached its peak in late April? It is down around 8%. That is solidly in the range of a typical 5 - 10% correction. After the run-up from the March 2009 lows it is not surprising that we were due for a correction. We believe that this is nothing more than a cyclical correction in a bull market.

Stocks (and the market) are not expensive based on historical standards. Earnings will continue to grow and we will wake up at some point and find out that Europe is not that big a deal (from a global growth perspective).

Our investment strategy remains unchanged, which is to buy large cap stocks with growing earnings that have attractive valuations. At the current time, we are finding lots of stocks that meet this criteria.

who am I

This is my first blog entry. Over time, I will try to share my opinions about the markets, stocks and the financial business. Updates will occur on a semi-frequent basis as I have things to discuss. Would love constructive feedback so I can provide more useful comments.

Who am I? I am the founder of an investment counsellor in Toronto. We provide money management services to our clients through segregated funds. Our aim is to preserve capital while trying to grow assets by buying conservative, growth stocks. Prior to this, I spent over 20 years with large institutional firms. I have predominately participated in the US Markets. I have managed institutional, private and mutual fund mandates.