Finally, the last day of the year is here. As I wrote last week, I will not miss 2014, personally. As to the stock market, overall, it turned out to be quite a good year. Now, if the market finishes today as I think it will, then, I can say I will miss 2014 professionally. The year behaved mostly as I suggested it would when I suggested it would, and if the Dow finishes above 18,000 today, then that will be my professional icing on the cake. In the summer of 2014, I said the Dow would achieve this lofty height and here we are.
I am a fan of Greek mythology, and my opening paragraph points to hubris, sporting just a bit too much pride. We all know what the market gods can do to anyone who demonstrates hubris. My ship could, without warning, encounter a storm and then crash upon the rocks, or I could be lulled into believing my island of refuge is a place I never want to leave.
Given this, I humbly bow to the market gods and I thank them for 2014, a year in which, if one played the fundamentals, one made money. After all, it is easy to win in a market bent on going up, a market that, despite the heavy winds from the breathless media, the siren songs of the celebrity analysts, and the misdirection from the talking heads, sailed forward on the fundamentals, albeit on rough seas from time to time.
The coming year promises more of the same waters – improving fundamentals and improving corporate profits occasionally lost in the whitecaps and churning around the Fed, the jabber around overvaluation, and, of course, the rhetoric from the stupid heads in Washington D.C..
No matter, the question I posed yesterday is where will the money flow in 2015? My guess is just about everywhere, except toward oil and good. More specifically, though, in market such as the one we have now, it is best to find the low spots, the places that are not paying attention to the fundamentals or, for one reason or another, have not yet caught up to the fundamental flow. The European economy is just such a place. It is a low spot.
- Those who bought European stocks at the height of the Eurozone crisis were handsomely rewarded: In 2012, the FTSE Eurofirst 300 returned 15.14%, in 2013 it increased by 12.41%. Even this year it managed a rise of around 5%.
Again, with all due respect to the market gods and with pronounced humility, I wrote in the fall of 2012 that it would be wise to look to Europe as an investment. I said back then that despite the fundamental economic woes and the din of doomsayers screaming about the collapse of the euro and the fall of the Eurozone economy, the European markets would do well.
- That’s despite regular warnings about the collapse of the Eurozone, the Germans’ reluctance to allow the European Central Bank to print money and frequent scares about the banks — and even, in 2013, the collapse of Cyprus’s entire banking system.
There are many reasons to see Europe now as another opportunity, but the most important is based on the fact that the European Central Bank (ECB) has fundamentally fixed the banking issues that were the source of the calls that the Eurozone would collapse. That effort is over and now the ECB, after some political rest, can turn its attention to reviving the European economy.
- The most important reason is the ECB’s long-delayed quantitative easing effort. At the central bank’s last meeting in December, President Mario Draghi made it quite clear that quantitative easing will go ahead, whether the Germans like it or not.
The US clearly demonstrated how this works, as its QE program stimulated record US exports that paved the way for US employment growth.
- Exporters are likely to profit handsomely from this. Analysts at U.K. investment magazine Investors Chronicle say that a rule of thumb in Europe is that, if the euro depreciates by 10% against the U.S. dollar, this translates into a 10% upgrade for European corporate earnings.
So, consider Europe an investment opportunity for 2015, but don’t wait too long.
- Strategists at HSBC prefer European stocks to U.S. equities, saying they are deeply undervalued. The trend-adjusted price/earnings ratio — a seasonally adjusted earnings multiple used by HSBC researchers for valuation that takes into account cyclical factors — shows that European stocks are trading at a 40% discount to U.S. stocks.
As well, keep in mind the following when looking at oil in relation to the economic fundamentals of Europe, as well as the US.
- In conversations that may help clear the way for more overseas sales of U.S. shale oil, the Commerce Department’s Bureau of Industry and Security (BIS) has told companies seeking clarification on the legal status of so-called “processed condensate” that self-classification – whereby companies export their product without any formal authorization – could be a way forward.
I wish you all the best 2015.
Trade in the day; invest in your life …
