Yesterday Slovakia voted ‘No’ to the expansion of the ESFS and while we know they will re-vote and pass it…something VERY interesting happened.
Instead of the big market slump in Europe that so many people were predicting (some of course were predicting a crash) the key European markets (STOXX and DAX) went up…in a big way.  Right from the opening bell it was a rally.
Business news services were scrambling to think of reasons why this might be happening. Many ideas were floated: Slovakia already said they would re-vote and say ‘yes’, markets are waiting for the next France-Germany announcement in November, etc.

I would like to offer a different explanation, one that reeks of both heresy and thought provoking depth.

The ‘hot money’, the big foreign investors (hedge funds, institutions and large scale pensions) that were lobbying insults at European leaders and claiming that Europe needs to break apart and the Euro was an utter failure…have done their worst. They did not get their way and so they left.  See, all that ‘hot money’ is already long gone from Europe.
Why are the markets rallying in a week of bad news? Because the foreign investors really cannot ‘punish’ the Euro markets any more. They took their ball and went home, so all they can do is piss and moan from the sidelines.

Think about it:

1) The key investors pulled out of funding EC banks several months ago. The ECB then stepped into to offer unlimited inter-bank lending and dollar repurchasing upon request.

2) Foreign investors spiked the government bond markets over the summer driving Greece to absurdity and then launched a coordinated attack on Italy and Spain. Again the ECB was forced to step in and repurchase bonds and then offset (sterilise) the purchases.

3) From July to late August the DAX (the big German exchange) dropped over 2,000 points (!) as foreign investors sold every European bank and industrial firm they were holding.

4) CDS spreads (credit default swaps) blew out on huge bets that the Euro would crash, Greece or Italy would default, etc. The short sellers loaded up on shorts to the point were all the major exchanges simply banned short selling for the rest of 2011.

All that sound, all that fury. All gone…
Well timed ECB intervention has kept the worst at bay. I suspect the politicians simply waited the storms out and applied selective treatment where needed.

Don’t believe me? Then please think about these points:
For the last 2 months the bond market has been calm, Greece is on schedule for the next aid tranche and the DAX has gained close to 1,000 points in 2 WEEKS as people snap up the bargain blue chips left on the floor during the stampede.
Slovakia ‘No’ vote and even the collapse of a large European bank (Dexia) both of which happened in the last week did little to dent the business climate here.

I think the explanation is shockingly simple…that locals and local investors are the only ones left in European markets.

They can see that the needed work is being done and they are voting with their Euros through buying under priced equities and assets. Some internationals are coming back of course but mostly the savvy value investors. The low key types who are hunting for a good return.
The screaming headlines in the Anglo press still promise imminent doom but the current climate is proving this false.

I think the Eurocrats won and I am glad they did, the rebuilding will be slow and for many quite difficult but now that the storm is passing we can get to work building the kind of Europe that will be better positioned between the east and the west.

The ‘hot money’ will come back of course and once again try to tell everyone what to do. Hopefully we will remember then that with hot money comes mostly hot air.

Value stocks – Free stock picks

There are hundreds, nay thousands of places to go to get stock picks. All that is required is to give them your money and they will tell you what to buy.

I think this model is good for those firms that use it but completely sucks for the rest of us. Therefore, I am putting my writing where my money is. I will update my blog about once a month and I will tell you what stock I like. I will either be holding or looking to hold the stock.
In addition, I will do follow up and tell you how the recommendations are doing over time and how I am doing in general. Feel free to ignore my picks and make you own.

Feel free to use my picks yourself, that is why they are being made. Feel free to contact me if you have made money off my picks and tell me about it. (just use the contact link on the left of the page). At the moment I am concentrating on German stocks. These can be acquired from almost any service for minimal fees.

Pick 1 – Fielmann AG (I am currently holding this stock)
FIE:GR ISIN # DE0005772206

This stock is a rock. Since 2008 the stock has delivered solid year end returns for its’ investors. Caution: This pick falls well outside my normal zone so first let me present the negatives:
1) Expensive – as I write this the stock is trading at 74€. This is a bit steep for my tastes as it reduces the potential upside.
2) Smallish, youngish – Est. in 1972 the company has strong sales and assets (assuming good bookkeeping of course) but is several orders of magnitude smaller than the real blue chips.
3) Older founder - could create problems with succession upon retirement.
4) Retail related – retail firms are notoriously unreliable and I avoid them like the plague. Fielmann is partially retail. They make their own glass but sell many brands of eyeglass frames. Thus, some worrisome volatility still exists.
5) Insane P/E ratio – the stock’s P/E is way more than its contemporaries.

Positives:

1) The company is retail but also controls their own fabrication and distribution networks. They make their own stuff, distro their stuff and their stores sell their own stuff. Due to their size the firm has achieved economies of scale.
2) Regional penetration in Central Europe. While primarily German, the firm has good market share in several others countries making it more resilient to single country shocks.
3) Tight Share control. Only 43% of the stock is free floating. In times of valuation decline the family and / or foundation ownership can always enact buybacks to increase the share price and protect investors.
4) Good secure value. The 5 year retrospect shows that the stock has be surprisingly resilient and steadily improving despite some truly challenging conditions in the European economy.

Expectations: Barring a messy dispute in the event of the founder’s retirement or death (Günther Feilmann is 72) the stock should be a steady performer over the next 2 to 3 years.

Barring a crisis or some scandal, I expect steady returns leading to a solid topline of 105€ at which point I would advise selling the stock and booking the profits. As Fielmann is a brick and mortar, traditionally built German firm, it will not achieve real rock star values and I think a doubling of share value is unrealistic. However a 30% gain is achievable (over the next 2 to 3 years) once the market stabilizes and a few quarters of solid central european consumption reports bolster the stock.

Recommendations: Buy at any price under 80€, (hold) - sell at 95 - 105€ booking 15 – 30% returns.

When I told my friends I had invested in the stock market, many of them were outright horrified. I was warned on the perils of stocks, told second hand tales of those who had lost money and bluntly told I was in over my head. One guy even spilled the beans on his own stock catastrophe a few years back. I was cautioned that the markets were fickle and volatile. It was a sucker play and many felt I was the sucker.

So why the hell did I do it? Why did I put skin in the game? After all, I refuse to bet, even for pennies, I will not enter a casino, and I am arguably the poorest person within my circle of friends.
Well, on paper picking stocks is easy: Buy low - sell high. Don’t buy stuff you know nothing about, pick companies you think make good products and whose products you use. Set limits, what goes up must come down, etc. Like Hal Holbrook said in Wall Street ‘Stick to the fundamentals…good things take time.’

Of course if it was that easy, all the warnings and horror stories would not be necessary. All of the above is still true but the devil is in the details.
The difference is I believe that I understand a few of those details. For example, just because your valuations are up does not mean you made any money. Do not borrow against (leverage) your valuations. The money does not exist until you SELL the stock.

I also know that picking stock is not about having unique knowledge. If you have unique knowledge, do not enter the stock market, you will get fleeced. The stock market is actually about lots of other people ALSO knowing what you know. The trick is you need to know it first, or at least early. You make money after many other people figure out what you have already figured out.
For example: If a company makes a new multi-billion dollar deal in Brazil the stock should (and almost always will) rise. When you know that information and when you buy that stock will determine how well you do.
1) If you already own the stock, you need do nothing and your valuation will rise.
2) If you buy the stock at the beginning of the day you will see the stock go up and your valuation will rise.
3) If you buy the stock at the end of the day you can only hope that other people are slower than you and that the stock will go up some more tomorrow allowing your valuation to rise.

In the end, timing is everything. But to know the how and the when, you have to put in work. Lots and lots of work. You have to read news, follow indices, read corporate reports, track term trends and the like. It is not easy; this is why people at brokerage firms are paid lots of money to do this stuff.

I am not paid to do this stuff, I am paid to teach. Therefore, my friends are right and I am a fool. Except…reading financial news and pulling it apart is a hobby of mine and has been for years. I have been secretly dreaming of buying stock since I was in high school. Most of my friends didn’t know that. Now, they do.

My picks are up +8.61%