Tag Archives | TEF

Ignore the Holiday Superstitions

As we are on the eve of Thanksgiving and Christmas holiday shopping season, you’re about to get inundated with ridiculous expressions like “Santa Claus rally” and market superstitions that would have you believe that the price action on the first trading day of the year—January 2—will determine the returns on the market for all of 2014.

It’s hard to believe that grown men and women peddle nonsense like this, but the financial press is flooded with it every year.

To be fair, December and January tend to be good months in the market, with average returns of 1.8% and 1.7%, respectively, according to a study that Ken Fisher did in The Only Three Questions That Count. But July had the best returns of any month, at 1.9%, making “sell in May” look like pretty terrible advice.

My advice?  Ignore these little bits of Wall Street “wisdom” as they pop up.  Market seasonal patterns, to the extent that they exist at all, are by no means guaranteed, and in most cases are not investable.  For most investors, whatever they gain in added return due to over or under weighting based on seasonal patterns will be more than lost in taxes and trading expenses.

Instead, focus on powerful and—importantly—investable macro themes such as the ones we cover in this newsletter.   Hold on to your investments for as long as the macro themes remain intact and as long as they are attractively priced.  Sell when the theme has run its course or when you’ve hit your selling criteria—such as having a stop loss triggered by a falling share price.

Update on Europe

The U.S. markets are on fire this year, on track for one of their best annual returns since the go-go 1990s.  But the pieces are quietly falling into place for a monster rally in Europe in the year ahead.  As I wrote in last week’s update, European stocks are priced to deliver far better returns than their American peers.

If you missed last week’s update, I recommend you give it a look today.  You might want to print it out and keep a copy handy, because the relative valuation theme is one I intend to return to over the next several months.

European stocks are cheap; even most bears would reluctantly admit this.  But cheap assets are often cheap for a reason, and in the case of Europe the reason is a nagging fear that the Eurozone could slide back into crisis at any time.

I’ve been very consistent in my view that Europe would always pull back from the brink when it looked close to jumping over.

Europeans may hate the austerity policies of recent years, but they still believe in Europe.  And their entire political class has staked its career on European integration.  Like ECB President Mario Draghi, Europe’s leaders will ultimately do “whatever it takes” to make the EU and its currency work.

In its press release for its semi-annual Financial Stability Review, the ECB said, “Indicators measuring systemic stress have fallen back to close to their pre-crisis levels.”

There are still risks, of course.  Italy still has no credible plan to return to growth and to pay down its massive sovereign debts, and Eurozone banks have a wave of loan refinancing in front of them that could restrict new lending and slow down Europe’s economic recovery.

Bank lending (or lack thereof) is an ongoing problem, and it’s not one that going to get fixed tomorrow.  But looking at government bond yields, the market seems to be confirming what the ECB said about indicators of systemic risk.  After rising during the “Taper Tantrum” that started in May, Spanish yields have drifted back to near three-year lows (Figure 1), and Italian yields are not far behind (Figure 2).


Could Europe slide back into crisis?  It could happen, but I wouldn’t bet on it. The bond markets are giving us the all clear for now.  If there is to be another round of Eurozone crisis, it won’t be happening any time soon.

Along these lines, I want to reiterate my buy recommendation on our Spanish “emerging markets lite” holdings, Telefonica (TEF), Banco Santander (SAN) and BBVA (BBVA).  We enjoyed a nice rally in all three earlier this fall, and I recommend using the recent lull as an opportunity to accumulate new shares.

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Charles Sizemore on Bloomberg TV: Investing in Europe

Charles Sizemore gives his thoughts on how to invest in Europe to Bloomberg’s Guy Johnson, live in London.  To watch the interview, see Emerging Market Exposure via Europe

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Telefonica: Latin American Growth, Crisis Prices

“Buy low and sell high” is the standard advice of any value investor. It can also be remarkably hard to put into practice.

You see, we humans are herd animals, and we tend to think and act as groups, particularly during times of stress. Call it the primal human instinct to seek strength in numbers.

Unfortunately, while this instinct may ensure our survival during times of war or natural disaster, it handicaps us as investors. When we see others panicking we too sell in fear or stand paralyzed in indecision at exactly the time we should be buying with both fists.

All of this is a lengthy introduction to the subject of this article, Spanish telecom giant Telefonica (NYSE:TEF).

Telefonica has had a rough year. The price of its U.S.-listed ADR are down nearly 70% from their pre-2008 highs. The domestically-traded shares have fared slightly better do to the lack of currency movements, but results have been dismal nonetheless.

Spain’s crisis has become Telefonica’s crisis. As the most liquid stock in the Spanish stock market, Telefonica has become a proverbial punching bag and an outlet for traders wanting to short the embattled Eurozone country.

This article was published on GuruFocus.  To read the full article, please see The Case for Telefonica.

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Christmas May Come Early This Year

It’s a little early for Christmas in July, but now is the time for investors to be putting together their “Christmas lists” of sorts.

Recently, I wrote a piece that described an old investment strategy of Sir John Templeton (see “An Anniversary We’d Prefer to Forget”).  Sir John would make a list of companies he’d love to own “if only” they fell to a more attractive price.  He would then place limit orders to buy those companies at prices substantially below the current market price.  In the event of a sharp selloff, the limit ordered would be executed, and Sir John would have his shares at the prices he always wanted.

His rationale for the strategy was simple enough: we humans are instinctively herd animals, and we tend to panic when we see others around us panicking.  We lose our independent judgment and we freeze in fear at exactly the moment we should be buying aggressively.  Templeton’s move was designed to take his own emotions out of the equation; Sir John understood his own human shortcomings, and essentially gamed himself.

Today, with Europe teetering on the edge of a potential meltdown,  I’m going to recommend that investors take a similar approach, though mine has the added bonus of adding a little extra income.

I recommend that you make a list of strong multinational companies based in Europe that you are confident can survive Armageddon with their businesses intact.  Ideally, these companies would have significant percentages of their revenues coming from outside of the Eurozone.

Once you have your list of stocks, consider selling deep out-of-the-money puts on them.  If prices remain relatively stable or rise, the options expire worthless and you pocket the premium.  And if the share prices take a nosedive, the options will be exercised and you will be obligated to buy the shares at the prevailing market price—which was your objective all along.  And you still get to pocket the premium.

Here a little explanation is needed.   When you buy an option, whether it be a call or put, your risk is limited to the price you paid for the options.  You are buying the right to buy or sell shares at a given price, not the obligation.

Selling, however, is a much trickier business.  Your upside is limited to the premium at the time you sell the option.  But your downside is much, much bigger.  In fact, when selling a naked call option, your risk is theoretically infinite.  For example, if you sell the right to buy Facebook (Nasdaq:$FB) at $38 to another investor and the stock rises to $100 the next day, you’re on the hook to buy at the prevailing market rate of $100 and sell at $38.  Not an appealing prospect.

Likewise, when you sell a put, you are giving an investor the right to sell you shares at a price that might be far higher than the prevailing market price.  So, when selling put options on your list of European stocks you’d like to own, make sure that you have the cash on hand to handle the trade if it is exercised.  Don’t get greedy and sell contracts for more shares than you can afford to buy or that you would ideally like to own.

I’m not going to recommend specific put option contracts for you to sell because the entire point of this article was for you to create a list of stocks you like at prices you want to pay.  I also want the advice in this article to be general and something that you can use months or years from now; recommending a specific contract would make this article too short-term for my liking.

I will, however, toss out a few company names for you to consider.  Last week, I recommended Spanish bluechips Telefonica (NYSE: $TEF), Iberdrola (Pink:$IBDRY)and Banco Santander (NYSE:$STD) (see “Bargain Hunting in Spain”).

I continue to like all three, and to this list I would add French oil major Total (NYSE:$TOT) and British telecom giant Vodafone (NYSE:$VOD).  While Vodafone is not a Eurozone stock, it has significant operations in the Eurozone and I would expect its share price to take a tumble in a general market rout.

If you’re not comfortable with options, that’s ok.  You can accomplish essentially the same thing by placing limit orders like Templeton.

Disclosures: Sizemore Capital has positions in TEF.

This article first appeared on MarketWatch.

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This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.