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Happy Guy Fawkes Day

guy-fawkes-maskRemember, remember the Fifth of November,
The Gunpowder Treason and Plot,
I know of no reason
Why the Gunpowder Treason
Should ever be forgot.
Guy Fawkes, Guy Fawkes, ’twas his intent
To blow up the King and Parli’ment.
Three-score barrels of powder below
To prove old England’s overthrow;
By God’s mercy he was catch’d
With a dark lantern and burning match.
Hulloa boys, Hulloa boys, let the bells ring.
Hulloa boys, hulloa boys, God save the King!

–Traditional English nursery rhyme

It doesn’t get much press on this side of the Atlantic, but it should.  Today, November 5, is Guy Fawkes Day, the day that the English remember one of their most notorious villains or one of their most celebrated heroes, depending on their mood or ideological leaning.

On this day in 1605 Fawkes, a disgruntled religious minority tired of official abuse, attempted to take down the entire English government—king, ministers, parliament and all—by blowing up the House of Lords with a large cache of gunpowder during the State Opening of Parliament.

Fawkes was discovered and promptly executed, but he is remembered—in typically dry English humor—as the last man to enter parliament with honest intentions.

2013 has been a frustrating year in American politics.  We came a lot closer than we should have to defaulting on our sovereign debts. We have a Democratic administration that didn’t bother to beta test the website that was the lynchpin for the biggest change to the health system since Medicare and Medicaid were introduced, and a radicalized Republican minority that wants to eliminate the Federal Reserve.

A less-violent “Guy Fawkes option” of running the entire government out of town and starting over sounds a lot better than it should.  But as investors, we have to keep perspective.  With few exceptions, America’s political system has always been a chaotic mess.  In our short history, we’ve had a civil war and four presidential assassinations.  We’ve had our capital burned to the ground.  And we’ve had more political scandals than I can count.

And guess what: Americans have a way of getting on with their business.  My advice is stop worrying about politics and focus your energies on finding quality investment opportunities.  Here in the United States, we are still in the early stages of the biggest energy revolution in a century.  The rise of Generation Y will create a new baby boom in the late 2010s and early 2020s. And the aging of the original Baby Boomers will create challenges that will make savvy entrepreneurs wealthy.

These are just the opportunities here in the United States.  Looking overseas, the rise of the new emerging-market middle class is the biggest investable macro trend of the past 50 years.

So tonight, pour yourself a drink and offer a toast across the Atlantic. Wear a Guy Fawkes mask if you feel like it, or burn a Guy effigy (or the effigy of whatever prominent politician irritates you the most) if you’re not breaking neighborhood ordinances in doing so.  But come tomorrow morning, toss the politics out the window and focus instead on finding solid investments.

 

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE 8-part investing series that will not only show you which sectors will soar but also which stocks will deliver the highest returns. The series starts November 5 and includes a FREE copy of his 2014 Macro Trend Profit Report.

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Has Greece turned the corner?

Europe has been calm of late.  Former Italian prime minister Silvio Berlusconi is facing house arrest, and it barely makes the news.  A year ago, this would have caused a run on the euro and roiled the world’s capital markets.

And Greece, the country that first comes to mind when the words “Europe” and “crisis” are used in the same sentence, has been relatively quiet as well.

Actually, I should rephrase that.  Greece is far from quiet.  In fact, even doctors have taken to the streets in protest over…well…who cares, really.  The fact is that the capital markets have stopped reacting to news out of Greece.  Greek bond yields have bounced around in a fairly tight range all year and have actually been falling for the past two months…in spite of the global Fed tapering scare. There is a tacit understanding that Germany will continue to keep the Greek government afloat indefinitely, so long as Greece continues to at least make a credible effort at reform and austerity.

It’s not too terribly surprising that Greece will need more bailout funds this year and next.  But what is surprising is that Greece is slowly clawing its way out of perma-crisis.  Greece may actually post a primary budget surplus (i.e. a budget surplus excluding interest payments on existing debt) this year.  In fact, through the first seven months of the year, Greece reported a primary surplus of €2.6 billion.

Yes, you read that correctly, and no, it wasn’t a sarcastic joke.  Greece’s condition is actually improving.  The country still depends on its bailout lifeline for the fragile stability it has at the moment; any attempt to go directly to the capital markets would plunge the country back into crisis and probably default and ejection from the Eurozone.  And its economy is still contracting; GDP shrank by 4.6% last quarter.  More than a quarter of Greek are unemployed (see chart), and wages are falling.

Still, the GDP contraction is the slowest in two years, and we should remember that employment is a lagging indicator.  It’s not unusual to see unemployment remain high in the early stages of recover.

Is it time to consider Greek stocks?  Fellow “Best Stocks of 2013” contestant Meb Faber certainly thought so when he recommended the Global X Funds Greece ETF (GREK) back in January.  Meb was a little early on the call (which is a common curse on value investments), but he correctly noted that Greece had the cheapest stock market in the world.

Almost exactly two years ago, I mentioned three Greek stocks I would consider buying once the dust had settled after a sovereign debt default and possible ejection from the Eurozone.  Well, the default never happened.  But are the stocks a buy?

I’ll start with the Coca-Cola Hellenic Bottling Company (CCH).  Despite its name, this is not really a Greek stock.  It is based in Switzerland, has operations in 28 countries and serves 581 million people, primarily in Eastern and Southeastern Europe. Though listed on the Athens Stock Exchange, it also trades on the London Stock Exchange and on the NYSE as an ADR.

None of this is lost on the stock price.  For a nominally-Greek stock, Coca-Cola HBC is not cheap. It trades for 1.25 sales—only slightly cheaper than Coca-Cola Enterprises (CCE), the Coke bottler for most of Western Europe.  It’s price / earnings ratio—at 52.7—is overstated due to earnings being depressed.  But suffice it to say, this stock is not a screaming bargain by any stretch.

Hellenic Telecommunications Organization SA (HLTOY), as Greece’s leading phone, internet, and mobile provider, is a much purer play on Greece.  Its stock has also had an impressive run, up over 500% since bottoming last summer.

Yet despite the run-up, shares are not expensive, trading at 12 times depressed earnings and 0.85 times sales.  If you’re bullish on Greece, this is probably the safest way to play a rebound, though I should emphasize that Greece is still a very risky market.

And finally, we get to the National Bank of Greece (NBG), the third stock I said that I would consider two years ago.  Be careful with this one.  If Greece were to leave the euro or outright default on its debts—which, though not likely at this point, cannot be ruled out—this stock will be worthless.  If you buy this, you are making a bet that Greece stays in the Eurozone and continues to service its debts indefinitely.  Still, trading at 4 times earnings and only a few dollars away from its all-time lows hit earlier this summer, it might be worth a speculative bet.

This article first appeared on InvestorPlace.

Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, he had no positions in any security mentioned. Click here to learn about his top 5 global investing trends and get your copy of “The Top 5 Million Dollar Trends of 2013.”

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Japan Distracts Investors With Olympic Five-Ring Circus

“Tokyo 2020 Olympics could be shot in the arm for struggling Japan.”
NBC News

“The successful 2020 Olympic bid signals new hope for Japan.”
Time Magazine

So, that’s all it took.  Twenty years of economic stagnation and all Japan needed to get back on its feet was that the summer Olympics be hosted in its capital.  And after two decades of secular bear market, Japanese stocks are a buy again.  Such a shame no one thought of this sooner.

If you believe that, I recommend you close your brokerage account, withdraw the cash balance in a duffel bag, and then douse it in gasoline and set it on fire.  Because if you believe Japan is investable, you’re inevitably going to lose your money.  We might as well just skip a few steps and go directly to the fiery duffel bag.

But aren’t the Olympic Games good for the economy?

That’s the received wisdom.  But the evidence here is sketchy at best.

London hosted the 2012 Summer Olympics, and by the UK’s own estimates, ticket sales boosted British GDP by a whopping 0.2% in the third quarter of 2012. That’s hardly worth mentioning.

Hotels and food and beverage services picked up a little during the quarter the Olympics were hosted.  But the final analysis by the British government was that the overall impact was modest, and that consumption dollars spent on the Olympics might have simply “displaced other activity.”  In other words, an Olympic ticket came at the expense of a movie ticket that might have otherwise been purchased.

But wasn’t it good for employment?

Not really.  Quoting the UK Office for National Statistics, “Employment agencies showed some strength in the quarter and it is possible that some of this strength was related to the Olympics. However, there was no direct evidence from survey respondents to support this.

And hosting the Olympics isn’t free.  It cost the UK £9 billion to host the games, which amounted to £142 for every man, woman and child in the country.   (This is the part of the tab that the government picked up; private sponsors paid for quite a bit more.)

Of course, London’s transportation and infrastructure were improved in preparation  for the Games, and the UK will continue to reap the benefits of those improvements for years to come.  That has value, even if it is hard to quantify.

But would this matter to Japan?

Absolutely not.

Japan expects to spend about $6 billion building, among other things, 11 new sporting venues and 10 temporary ones.  But Olympic expenses rarely come in under budget;  Russia’s 2014 Sochi Olympics are on track to cost $50 billion, and the 2012 London Olympics went over budget by nearly 400%.

And the last thing Japan needs is new infrastructure.  At the risk of sounding alarmist, in another few decades there will be no Japanese left to use it.  Japan’s population shrunk by 200,000 people last year, and Japan is the oldest country in the world.  A quarter of the population is over the age of 65…and that number creeps up every year.

Hosting the Olympics provides the proverbial bread and circuses for the population, but it does nothing to address the country’s long-term problems.  With sovereign debts approaching 250% of GDP—and with fewer Japanese taxpayers to service that debt every year—Japan is heading towards a sovereign debt meltdown.

Japan’s domestic market is dying.  Not even Japan’s world-class multinationals see opportunity there today.   As a case in point, Suntory Beverage & Food (Japan:2587), one of Japan’s largest consumer staples companies, announced today that it would be buying the Lucozade and Ribena drink brands from Britain’s GlaxoSmithKline (GSK) for $2.1 billion as a means of diversifying outside of Japan.

Suntory has been aggressively expanding outside of Japan, where the company already generates just shy of a third of its revenues.  Expect this to continue, as it is the company’s only outlet for growth.

So, with all of this said, are their pockets of opportunity based on the Olympics bid?  Maybe.  But I wouldn’t get too attached, as the companies best positioned to profit have already seen their share prices jump.  Taisei Corp, which built the stadium for the 1964 Olympics, saw its shares jump by 17% on hopes that it will be involved in the 2020 games.

The best course of action?  Move on.  Ignore the Olympic hype and seek your investment opportunities elsewhere.

This article first appeared on InvestorPlace.

Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Click here to learn about his top 5 global investing trends and get your copy of “The Top 5 Million Dollar Trends of 2013.”

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The Cyprus Crisis and What It Means For Investors

I’ll give the European Union credit: at least they are creative at finding new ways to upset the world’s capital markets.

Instead of demanding just the usual austerity measures of higher taxes and lower spending—and a potential haircut on speculative creditors such as hedge funds—the EU bailout negotiators insisted over the weekend on extracting a pound of flesh from the customers of Cypriot banks.  Savers would see as much as 10% of their checking and savings accounts expropriated to help cover the cost of the bailout, and the levy would apply even to accounts insured by the Cypriot equivalent of the FDIC.

Ouch.

Needless to say, the news didn’t go over well in Cyprus; it led to a small-scale bank run as depositors rushed to get to their cash.  It also didn’t go over particularly well in Russia.  Cyprus is notorious as a haven for Russian funds of…ahem…questionable origins.  Roughly a quarter of all Cypriot bank deposits are owned by Russians.

As I’m writing this, it looked likely that Cyprus’ parliament would shoot down the bailout agreement hammered out between the government and the European Union on the grounds that it wasn’t fair to small local savers who assumed their deposits were protected by government guarantee. (Imagine any democrat or republican approving something like that here; it would be political suicide.)  The government is also reluctant to “soak the Russians” out of fear that it will destroy confidence so badly as to end Cyprus’ existence as an offshore financial center.  And I can’t say I blame them for not wanting to anger the Russian mafia dons or Russian President Vladimir Putin.  That’s not good for your health.

So what happens now?

Good question. My best guess is that the deal is slightly tweaked to allow the Cypriot government to save face but that the bailout goes through and the depositors get hit.  Politically, German Chancellor Angela Merkel and French President Francois Hollande cannot ask their taxpayers to come to the rescue of dirty Russian money, nor should they.

If the bailout flops, the options quickly get messy.  I don’t see the EU backing down this time and watering down the deal, nor do I see the European Central Bank continuing to provide emergency liquidity.  This means that without the bailout, the Cypriot banking system will collapse, and given that the banking system is eight times larger than the economy, there is no way that Cyprus will be able to make its depositors whole.  Barring some sort of last-minute emergency loan from Russia (which would presumably come with some pretty wicked strings attached), Cyprus either accepts the EU bailout and goes about its business or it drops the euro, issues a new currency, and then falls into hyperinflationary oblivion.

What does this mean for the Eurozone?

The fear was that seizing bank deposits would set a terrible precedent and lead to bank runs in Spain, Italy and other indebted countries and plunge us back into crisis mode.  Once bank depositors are seen as a viable target, you create a slippery slope.

But judging by the market’s reaction, this is a non-event.  European stocks took a small hit on the news, though it caused nothing like the turmoil over Greece, Spain and Italy last year.  Bond yields in these problem countries spiked up but hardly to levels that would cause alarm.

There are a couple reasons why the bank run didn’t happen…or at least hasn’t happened yet.  To start, Spain and Italy already effectively had bank runs last year.  Funds have been leaking out of both since the onset of the crisis, and their respective banking systems have been kept solvent by the ECB.  But more basically, it’s an open secret that Cyprus is a haven for dirty money (wink wink), and investors see clear differences between their own banking systems and that of Cyprus.

There is also the “Draghi Put,” or the belief that ECB President Mario Draghi will live up to his word to do “whatever it takes” to keep the euro intact.  This, more than anything, has been what has stabilized the Eurozone over the past nine months.

And finally, don’t underestimate the effects of “crisis fatigue.”  After three years of crisis, these sorts of headlines simply don’t have the ability to move the market like they used to.

Things could still get very ugly very fast in Europe if the feared contagion finally does happen.  But for now, it looks as though this too shall pass.

Cyprus may choose to leave the Eurozone before this is over or may well become a Russian client state; anything is possible at this point.  But I don’t see any of these outcomes changing the direction of events.  The Eurozone will undergo deeper integration.   With or without Cyprus, the rest of the Eurozone will sink or swim together.

This makes things a little awkward for non-Eurozone EU members like the UK, Sweden and Demark.  But even as the cumbersome, confusing mess it is, the Eurozone will muddle through.

How are we to invest in this environment?  I would recommend using any sell-offs to accumulate shares of some of Europe’s finest companies.  One in particular I like at current prices is Spanish telecom giant Telefonica (NYSE:$TEF).  Telefonica is quietly paying down its debts, and I expect the company to reinstate its dividend within the next 1-2 years.  In the meantime, it’s an excellent way to get exposure to the growing markets of Latin America, where it gets more than half its revenues.

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Disclosures: Sizemore Capital is long TEF.

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