Draghi’s QE Shock And Awe Sends Stocks Higher, For Now; Greek Election Outcome Looms; German Stocks To Buy In A QE Eurozone; Finding Oil’s Survivors
Desperate times, call for desperate measures? No one knows who originally uttered this often-used phrase, though, some trace it to ancient Greece, and Hippocrates, which appears in Amphorisms: “For Extreme Diseases, Extreme Methods Of Cure, As To Restriction, Are Most Suitable.” Whatever the case, the European Central Bank (ECB) joined the “free money/stimulus” crowd last week, when ECB Chair Mario Draghi announced a massive bond-buying program, 60B Euros per month; or, about $67B per month in assets, including government bonds, beginning in March 2015, and running till September 2016 — at least. As Vito Ricanelli writes in this weekend’s Barrons’s,”this quantitative easing program, which would expand the bank’s balance sheet by about 1.1T Euros, met [or exceeded] market expectations last week,” pushing stocks strongly higher on Thursday, before retreating nearly half on Friday — heading into today’s (Sunday) Greek parliamentary elections.
Markets reacted positively to the news, as the DOW surged some 260pts., before closing for the week on Friday up 161pts., or one percent, to 17,672; while the S and P 500 climbed 32pts., or 1.6 percent, to 2,051; and, the NASDAQ was the biggest gainer — rising 124.7pts., or 2.7 percent, to 4,758. For the year, the DOW is -.84 percent, the S and P -.34 percent, and the NASDAQ +.46 percent.
Consequences Of European QE
While the initial news of Europe’s QE initiative was received my most traders positively, the mid-to-longer term consequences are more uncertain. Bradley Davis, writing in this weekend’s Barron’s, “Consequences of European QE,” wrote “the scheme might not work; and, still isn’t a sure thing that it will boost inflation — the key problem in the Eurozone.” I would argue it is structural economic reform to provide the incentives to create new business and jobs;, but, I digress. Mr. Davis adds, “the fiscal discipline, vs. fiscal stimulus argument that’s been ongoing for years in Europe shows no signs of resolution. Without a little of both — discipline and stimulus — the European economy could be in trouble.
“It’s hard to see where the ECB’s money will go and what it will do — aside from devaluing the Euro,” wrote Randall Forsyth in this weekend’s Barron’s. “Interest rates and credit spreads, are already near rock-bottom; banks say they’re willing to lend — but, aren’t finding willing borrowers.”
The Bank of England’s Governor, Mark Carney, speaking at the World Economic Forum in Davos, Switzerland on Friday warned markets to “brace for possible trouble in 2015, as the U.S. Federal Reserve tightens monetary policy and liquidity evaporates — fearing that the world financial order has yet to face its first real test [since the 2008 Great Recession].” Mr. Carney cautioned that “diverging monetary policies in the U.S., Britain, Europe, and Japan, may set off further currency turbulence, and test capital outflows across the global economy — including emerging markets.”
Mr. Carney has plenty of company with respect to his warnings and concerns. Art Cashin, Head of UBS Floor Operations at the NYSE, told CNBC last week, that “the laid back, cerebral attitude [of Central bankers] is going to disappear. At some point,” he said, “somebody is going to get their currency to a place where it’s going to cause enough pain to somebody else; and then, it’s going to turn into a real war.” Mr. Cashin also warned that “the waves of deflation are going to strengthen, as currencies fall. These nations have been exporting deflation; but, it just hasn’t turned into a tsunami yet. When it gets close to that, then you’re going to see central banks around the world decide they better get a bit more cooperative. This currency war cannot go well…..they never have,” he concluded.
So, with Greek parliamentary elections today — and the expected win by a radical, left-wing candidate who has vowed to renegotiate the terms of EU loans — and perhaps the luster of last weeks QE from Europe in the rear-view mirror — we’ll see how stocks react this week. It wouldn’t be surprising to see a bit of a Greek hangover.
German Stocks To Buy In A QE Euro Zone
Tim Gregory, Head of Global Equities at London’s Psigma Investment Management, says “QE will drive down the Euro, which gives clear advantage to exporting countries, which Germany is Europe’s biggest.” Mr. Gregory says “auto stocks are likely to figure prominently in the list of German companies,” that will benefit from the European QE. “His main play,” according to Digby Larner, a Wall Street Journal News Editor, for Europe, the Middle East, and Africa, based in Paris, France, this weekend’s Barron’s, is auto parts maker Continental (ticker: CON.Germany) which should see earnings lifted by its exposure to the dollar — relative to the falling Euro. He also likes automakers BMW (BMW.Germany), Daimler (DAI.Germany), and German chemical company Linde (LIN.Germany). “BMW would definitely benefit from a lower Euro,” Gregory added. “Linde should benefit; but, it did lower guidance last year — as a result of weak, year-end markets.”
JP Morgan Cazenove analyst, Joe M. Asumendi, has Continental at Neutral, with a 178 Euro ($202) price target. Asumendi has BMW and Daimler at Overweight, with price targets of 105 Euros, and 78 Euros respectively. “BMW will enter a strong, product-momentum phase, between full-year 2015 – and full-year, 2018 — with over 70 percent of its volumes being renewed during the period,”– he said. On Daimler, Mr. Asumendi said: “We believe Daimler’s earnings should see growth over the next couple of years — from better earnings momentum.”
Barclays European Chemicals Analyst, Andreas Heine, has Linde at Overweight, with a 177 Euro price target. “We don not assume industrial production picks up,” he said, but the strong dollar should drive earnings next year.”
Finding Oil’s Survivors
Finally, Mike Hogan, writing in this weekend’s Barron’s, had an article on some potential buys in the oil sector to consider — in the wake of the selloff these past few months. When surveying the wreckage in this sector, “the health of the balance sheet, and the cash-flow generating capacity of a company are key drivers,” said Brian Nelson, President of Equity Research at Valuentum. While David Trainer, CEO, and Founder of the stock advisory fund, New Constructs, said “free cash-flow is the single most useful metric for investors. Free cash flow isn’t just earnings,” he added, “net profit, or other values commonly reported in corporate financials,” Mr. Trainer explained. “it’s the real surplus from operations that could be spent on dividends, buybacks, or capital investments — that increase shareholder value.
“Neither site [analyst] finds much value in the oil patch,” Mr. Hogan writes. “Nelson recommends oil giant Chevron (ticker: CVX), and pipeline operator Kinder Morgan (KMI). Shale fracking leaders Continental Resources (CLR), and EOG Resources (EOG) would be attractive,” he says, if they’re performance weren’t so closely tied to oil prices.”
“New Constructs finds only19 of 190 energy stocks attractive: It’s top pick is Canadian oil producer Gran Tierra Energy (GTE), which has a solid balance sheet; and, an extremely discounted market price”
“Overall, New Constructs considers almost two-thirds of the 3,000 stocks it covers to [currently ]be overvalued,” and overdue for a pullback. Mr. Trainer agrees, and “predicts a period of fundamental change for the stock market — as values adjust downward.”
So, buyer beware. V/R, RCP