The Bull Market No One Is Talking About

By Dave Skarica  OCT 25, 2013 12:55 PM

European stocks will continue their rallies and the euro will continue to hit new multiyear highs -- and virtually everyone will continue to not notice.

 


Funny thing about markets: It's best to buy when no one else is.

Last summer you could barely find a soul who was bullish on Europe beyond maybe Jim Rickards and a few other contrarian commentators, including myself.
 
I have always taken a contrary view toward the so-called European debt crisis.
 
The problems with the so-called PIIGS -- Portugal, Ireland, Italy, Greece, and Spain -- has been blown out of proportion. Out of these countries, Italy is the only real player (Spain is large, but not gigantic) on a global scale. Few realize that if you actually take the eurozone as a whole, its deficit is half of that of the United States (about 3% of GDP as opposed to 6%) because of the strength of the northern nations. 
 
In addition, Germany is forcing its model of austerity and productivity on the rest of Europe -- that is, a production model rather than one of consumption. Furthermore, as most of the PIIGS have seen domestic consumption decline, it has actually put many of their trade budgets into surplus.
 
Very quietly the euro broke its high for the year and hit a near two-year high of 1.37 against the US dollar. The funny thing is that no one is talking about this. In addition, Global X Funds (NYSARCA:GREK), the iShares MSCI Italy Index (NYSEARCA:EWI), the Spanish iShares (NYSEARCH:EWP), and the iShares MSCI Austria Investable Mkt ETF (NYSEARCA:EWO) have all had huge rallies since the summer, way outperforming the S&P 500 Index (INDEXSP:.INX).
 
So why is no one talking about these rallies?  I think since the debt crises picked up steam in 2011, it was easy for the media to point fingers at Europe as some sort of dysfunctional socialist mess with an unfixable political situation. However, through austerity and some cleaning of its  government structures, Europe is now about to recover. Don't get me wrong -- there are still many problems, such as negative demographic trends and an overleveraged banking system. However, in the short term, Europe should outperform.
 
I think painting Europe as a mess politically, when the US is just as big as a mess politically, was an easy way to divert attention from the 18-trillion-pound gorilla in the room that is the US national debt (which at some point has to be dealt with). 
 
Most of all, what the European situation of the past decade has taught us is that if something becomes cheap enough, you should buy it. In June 2012, Greek stocks had a 10-year trailing P/E of two. That is not a typo -- two . The stocks were down over 95% from their lows, which is more than the Dow Jones (INDEXDJX:.DJI) fell during the 1929 to 1932 crash (89%). 
 
At their lows last year, markets in Spain and Italy were about 70% off their highs. At its bottom, Exxon (NYSE:XOM) had a larger market cap than the Italian market.  Italy is a rich country which has car makers like Porsche (OTCMKTS:POAHY) and Fiat (OTCMKTS:FIATY), retailers such as Gucci (OTCMKTS:GUCG) and Dolce & Gabbana, plus many more industries.
 
So yes, European stocks will continue their rallies and the euro will continue to hit new multiyear highs -- and virtually everyone will continue to not notice.
No positions in stocks mentioned.