Two weeks in Europe told me a lot, showed me a lot, and confirmed Russia is still one of the nastiest places you can visit, even in a city as gorgeous as St. Petersburg. What was obvious is the malaise and depression in the southern countries — Greece, Spain, Portugal and increasingly Italy — is now impacting the northern ones. From Denmark to Germany to Sweden, business in the Scandinavian countries and Germany is softening – also driven, in part, by the slowdown in China.
The slowdown is hitting business investment and consumer spending as evidenced by recently announced earnings by luxury goods makers such as LVMH (LVMUY) – outfits dependent not just on European but on Chinese sales as well.
The slowdown across the pond has brought out those screaming pundits who follow 500 or 1,000 stocks — however many it takes to get air time on CNBC — and they are taking a contrarian view. They scream (and man, do they scream): “Europe is cheap, Europe is cheap.”
It is . . . and it is going to get a whole lot cheaper. The current clash of austerity with a near-depression in the Mediterranean countries, and the simple fact that democracies have a hard time breaking promises, extending work weeks and taking money away from voters, means it is going to take a long time to put in place the structural reform that must occur before these southern economies grow again. And as long as they are not growing, the northern countries will suffer weak-to-no growth.
Time to keep your distance
What does this mean for U.S. investors? First, avoid European stocks, especially the banks. Forget the noise coming out of Germany about how strong and virtuous they are. Germany’s banks are a wreck and its state-owned banks, the Landesbanks, are (probably) more leveraged than Lehman Brothers before it went bust.
Second, avoid U.S. companies that are 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.
Ideas for investors
And that leads to two great investment opportunities. The U.S. automakers, Ford (F) and GM (GM). I write about them a lot, I am writing about them again now that earnings are out and my previous optimism can is now be seen for what it really is, terrific (and immodest) prognostication. I first recommended Ford at $7; it is north of $17. I first recommended GM at $17; it is 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.
The auto business is booming. Consumers have old cars; the average age of a car in the U.S. is now more than 10 years. Consumers have access to credit and new monthly payments are just a tad above the cost of maintaining an old car using way too 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 to 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.
Michael Shulman is the author of Made in America: Inside Stories of Success and writes several investment advisory services.