Caught With Pants Down

European sovereign spreads are moving the wrong way once again this morning. Spain's budget deficit is spinning out of control. Even if the EU or ECB steps in to help Spain they will likely want to wrestle out some reforms first. This is unlikely to go away quickly and will probably get worse before it gets better.

We have seen two Summers in a row when market participants were fooled out of their positions due to European sovereign fears only to find themselves chasing stocks at higher prices. While I am skeptical that we will see the exact same thing play out I do believe that these sovereign fears will be enough to wipe out the excess fluff in the market. This should lead to at least a meaty correction at some point. The only question is when.

Most sentiment indicators are pointing to market participants being long and there being few bears. This sudden flare up has caught most investors with their pants down, myself included to some extent. I have been expecting this correction but did not think it would occur during the three seasonally strongest weeks of the year. Normally, I would have rolled up the strikes on my SPY puts  when we rallied late last week and early this week. But I decided to wait.


Shubh Desai said...

Hi Tsachy,
What do you think about some of the Europe's ADR stocks that pay dividend like TOT, FTE, TEF etc. They look very cheap and some of them are at 2009 bottom level or lower. Do you think its wise to start accumalate some of these stock who love dividend?

Some of these stocks are pricing in full blown crises.

Tsachy Mishal said...

In telecom I prefer VOD over FTE or TEF. VOD has a much better business mix in that it owns 45% of Verizon Wireless and has businesses in emerging markets. At the same time within Europe its largest markets are Germany, UK and Italy. It is pretty much pure wireless, while most of the other European telecoms have a wireline component. Even with VOD's business mix it gets valued much like the other European telcos.

TOT looks cheap but I don't know how to value oil companies. If you know how to value oil companies and its much cheaper than US alternatives than I see no reason not to own it just because it happens to be in Europe.