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Whither Europe, and Where to Invest Instead?

Hedge the instability in Europe by investing in U.S. companies like Ford and GM


Whither, spelled with an “h,” is a word asking “where is one going?” Wither without the “h” is a word describing the wasting away of something. Whither Europe? A large part of it is withering away.

I just came back from two weeks in the northern part of the Continent and Russia — not really a nation part of anything, sadly for its people — and the malaise and depression in the southern countries is now impacting the northern ones. Business in the Scandinavian countries and Germany is softening — also driven, in part, by the slowdown in China — and conversations with everyone from tourists and tour guides to business people see growing malaise and no way out for political reasons.

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What does this mean for U.S. investors? First, avoid European stocks, especially the banks. Forget the noise coming out of Germany about how strong and virtuous they are — their banks are a wreck and their state owned banks, the Landesbanks, are (probably) more leveraged than Lehman Brothers before it went bust.  Second, avoid U.S. companies overly dependent on Europe. Many big multinationals have a big presence there but at the same time the problems they face have been factored into their stocks.

And that leads to two great investment opportunities. The U.S. automakers, Ford (F) and General Motors (GM). I write about them a lot, and I am writing about them again now that earnings are out and my previous optimism can now be seen as terrific prognostication.  I first recommended Ford at $8.25 to my newsletter subscribers in November 2011, and it is north of $17. Likewise, I recommended GM in mid-September 2011 at $20.40, and today it is north of $36. Both recommendations came from a factory visit to the GM pickup truck plant in Flint (you can read more about this in Made in America: Inside Stories of Success, and yes, I wrote it). When you see and hear things up front and personal, you learn a lot.

Business is booming. People have old cars, with the average age of a car in the U.S. now more than ten years old, and they have access to credit.  My cockapoo Sumo has a better credit score than many current auto buyers! And the new monthly payments are just a tad above the cost of maintaining an old car using way to much $4 gasoline.

What to do? Cars are not a hot “idea” — but they are leading the economy right now and their problems in Europe are already baked into their stocks. Given their run, and the inability of the market to punch through 1700 on the S&P 500, why not sell some puts?  If you sell GM weeklies one strike below the current price, you can net more than 25% on an annualized basis if they expire worthless. Ford’s stock is pretty close to the $17 strike but if you sold those weeklies your annualized return, assuming they expire worthless, is even better, north of 35%. And if you are put the stock, they have room to run and you turn around and sell calls to generate a “personal” dividend of more than 20% a year selling calls on these automakers.

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