Risk and the Euro Debt Crisis

03/21/2013 8:30 am EST


Jim Jubak

Founder and Editor, JubakPicks.com

It appears that Greece may again need funds from the EU, and MoneyShow's Jim Jubak looks at how the potential of another round of the debt crisis might influence stocks.

At the moment, Europe feels like it's déjà vu all over again. We’ve got the troika of the International Monetary Fund, the European Central Bank, and the European Commission back in Athens talking to the Greek government about another round of bailout financing. Small rounds: it’s €2.8 billion.

They’re asking the hard questions again to the Greeks, saying why don’t you cut the size of the Civil Service faster? Why haven’t you implemented more tax collection? You’re not thinking of letting the very, very unpopular new tax on property end at the end of 2013, are you? All these things. It feels like the Greek crisis again.

Italy? No government. France has just admitted that it’s going to miss its 3% target on GDP ratio for 2013. It's going to come in at at least 3.7%, according to President Francois Hollande. Spain, of course, continues to show 26% unemployment, and Mariano Rajoy keeps saying we’re going to stick to austerity. The United Kingdom seems to have moved back into recession again after the most recent numbers.

All this makes it feel like we’re going to see another round of the Euro debt crisis. Are we? I don’t know.

One important thing to consider is what’s the risk-reward ratio right here? Let’s take an individual stock like Banco Bilbao Vizcaya (BBVA), one of the biggest Spanish banks. It’s in fact the second-largest Spanish bank. It’s really a global bank. The gem in their crown is really their unit in Mexico, which produces something like 30% of their operating profit.

Way back in November, before this rally really took off—so we’re talking about November 11—the stock traded, the New York ADR, at $7.66. It then moved up really tremendously in the rally to late January, peaking on the 25th at about $10.56. We’re talking about a 38% rally in this one particular ADR.

You look at this and you look at your uncertainty of the market and you go OK, so at $7.66 back in November, the stock was really pretty cheap. It looked like maybe it priced in a lot of the worries about Spain, the Spanish economy, the rising bad loans in Spain.

Then at $10.56, you know you have a lot of optimism built in here. The question really is not so much which is right, which is wrong, because it’s very hard to tell whether we’re going to get some kind of rally in European stocks based on the European Central Bank doing something, or whether we’re going to slide back into the Euro debt crisis.

The point right now is how much are you expecting these stocks to run? If Banco Bilbao was at $7.60 or so, I’d be buying now. At $10.60 or so (it has moved back down to $10, and it’s been bouncing around $10 in the last few weeks or so), you have to say OK, this is not so much of a bargain. Maybe it’s time to take a little money off the table.

That in fact is how I think about the Euro debt crisis. Not so much whither I can guess whether it’s going to happen and when, but how the prices of stocks look given the rally, given the uncertainty, and where that puts the risk-reward.

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